February 2010 Franchising World

A new series will amplify the contributions of IFA’s leaders and notable franchise brands.  

The brief recap of the history of the International Franchise Association was presented in the January issue of Franchising World magazine. Throughout the year, IFA will expand on that history with a continuing series of articles which will amplify the contributions of the association’s leaders and notable franchise systems. This is the first of that series, a question-and-answer session with DLA Piper US LLP Partner Philip Zeidman, IFA’s general counsel.

FW: What was the regulatory and political climate that led to your being asked to represent IFA in Washington?  

Ziedman: In a word, it was a mess. A very small number of con artists had initiated “franchising” programs with no substance and little capital, and a few celebrities were imprudent enough to lend their name recognition to some of those operations. They were small in number. But franchising was in its infancy and there was little interest by the general press and substantive coverage of the positive developments, which were in their own early stages. Sensationalism won out. Taken together with some franchisees disgruntled by their terminations, that triggered the first stirrings of proposed legislation and regulation.

FW: Soon after, IFA moved its headquarters from Chicago to Washington and later you were named general counsel. What was the impact, and the significance, of this shift of focus to Washington?

Zeidman: As to the impact, I am sure it was a little disconcerting to some of the pioneers, many of whom were Chicago-based. But that didn’t last long in the face of the mounting evidence that there was going to be some governmental action. And, despite some suggestions that California and perhaps other states would move, it seemed likely that the federal government would take the first steps. U.S. Sen. Philip A. Hart (D) of Michigan introduced legislation and Sen. John L. McClellan (D) of Arkansas expressed an interest in conducting hearings. As it turned out, the first solid movement was regulatory: the Federal Trade Commission promulgated its Trade Regulation Rule on Franchising. Once that happened, it was hard to avoid the conclusion that the action (in franchising, as in so many other aspects of our national life) had shifted to Washington. The association moved its headquarters to Washington (at first, housed in our law offices), and the die was cast. For a brief moment, years later, a group sought to move the headquarters back to Chicago. It was touch and go for a bit, but wiser heads prevailed.

FW: As you look back over the years of legislation and regulation, federal and state, do you see any patterns? 

Zeidman: There are several strands, and some lessons. One is the interplay of federal and state action, peculiar to our federalist system of government. When the FTC took its first steps toward regulating franchising and simultaneously some states began muttering about doing the same, the IFA wisely foresaw the possibility of duplicative or inconsistent regulation. We tried to stave it off by seeking congressional support for federal preemptions; but then, as now, there was little appetite in Congress for telling the states what they could not do. So, in the near decade from the time the FTC promulgated its rule for comment until it issued it in final form, the states rushed in to fill the vacuum created by that delay; the overwhelming number of state franchise laws on the books today were adopted during that period. If there had been receptivity to the preemption argument we would be living today in a very different landscape. Second, if resisted skillfully there is also little appetite in Congress for interfering in franchisor-franchisee relationships. While most of the state franchise laws contain such provisions, time and again those efforts—Hart, Mikva, LaFalce, Coble—have been turned back at the federal level. Finally, I think we have to resist the temptation to demonize legislators considering franchise laws. They may be misguided. They may even be ignorant. But they are not malevolent, and it does no good to the cause of sound public policy to treat them as if they are.

FW: And of all those developments, which had the most lasting effect on franchising?

Zeidman: Not even a contest: the FTC Rule. Not because of its inherent strength; it doesn’t even provide a party injured by its violation with the right to sue. No, its significance lies in the pattern it established for presale disclosure, now closely followed by most of the states with legislation and by a number of foreign countries. And it is important because it has led to a culture of disclosure which, on balance, has been healthy for franchising. 

FW: Meanwhile, what was happening in the courts?

Zeidman: At the time franchising emerged as a technique for distribution, antitrust enforcement was at its zenith. So many of the earliest franchise cases related to testing the limits of the controls franchisors could impose on their franchisees (prices at which they could sell; where and to whom they could sell; whether the franchisor could require purchases from itself, etc). As antitrust law began to wane, the securities law origins of the new franchise laws led to a raft of allegations of misrepresentations by franchisors. As franchising matured and became more nuanced, the issues have migrated toward the special relationship between franchisor and franchisee, exploring the nature of the obligation a franchisor has to its franchisees.
FW: Some questions about change during these years. First, in franchising itself? 

Zeidman: So many that it is hard to select, but here’s a shot at it: Changes in who is the franchisor? A still small but increasing number of large companies which have concluded that franchising (sometimes, only overseas) is the most effective way to distribute their products. Who is the franchisee? Increasingly, not the little guy moving from a job to another kind of job but a multi-unit operation (more than half of all franchised units are now in their hands). Where is it happening? Everyday, somewhere new, exotic and unimaginable only a few years ago. There’s not much doubt that international franchising is today the fastest growing segment.

FW: In the International Franchise Association?

Zeidman: Again, it’s hard to choose. I’d say, first, the inclusion of franchisees, which has required all of us to focus on franchising instead of franchisors or franchisees. Second, a greatly heightened professionalism, made possible in part by the development and articulation of the economic underpinnings of franchising, as evidenced in the PricewaterhouseCoopers report and elsewhere. Third, the nature of the franchisor leaders: no longer entirely self made entrepreneurs, but increasingly organization men (and women–now there is a real change). And finally, the broadening of issues to reach those affecting small businesses and the health of the economy and the society itself.

FW: In the practice of franchise law? 

Zeidman: It’s become far more complex (and more competitive). As the bread and butter work of preparing disclosure statements and the like has become more “commodified,” the truly interesting challenges lie in international franchising, in resolving disputes, in dealing with technology in the context of franchising, in crafting innovative solutions, and in structuring sophisticated transactions.

FW: After all these years, do policymakers finally understand franchising? 

Zeidman: Not yet, but we are getting there. The IFA staff has done a superb job of telling the franchising story, but there are still some legislators who think all franchisors are large and rapacious and all franchisees are small and powerless. The truth, of course, is very different.

FW: And where are we headed?

Zeidman: Maybe the future is already here. Twenty five years ago the IFA commissioned a futurist to write “The Future of Franchising: Looking Twenty Five Years Ahead To The Year 2010”. The study concluded, “Franchisors will become an even more powerful lobbying group… Almost every service imaginable will be franchised… The overall picture for franchising is bright”. I rest my case.

EDITOR’S NOTE: Philip Zeidman was still in government service when IFA approached him to represent the interests of franchising in Washington. In 1968 when he opened his law firm, IFA became his first client. Today he remains IFA’s general counsel; and his firm, DLA Piper, has the largest franchise practice and is one of the largest firms in the world. For each of the last five years he has been named Global Franchise Lawyer of the Year by The International Who’s Who of Business Lawyers.