Issue

Franchise Relationship

In recent years, several states have proposed legislation to limit the right of franchisees and franchisors to negotiate business contracts by placing unreasonable restrictions on franchise agreements. Many seek to prop up under-performing franchisees to the detriment of the entire system, and particularly disadvantage the high-performing franchisees that go to great lengths to maintain operational standards, product quality, and brand reputation. Prospective franchise owners are already protected by the Federal Trade Commission (FTC) franchise rule, extensive federally-mandated disclosures, and additional state disclosure and registration statutes, while responsible franchise sales practices have become the industry rule, not the exception. Lawmakers should exercise restraint in passing new legislation that over-regulates the contractual business relationship between franchisees and franchisors so that franchise opportunities remain available for aspiring entrepreneurs in every state.

Franchise Relationship Bills have been introduced in several state legislatures during the last legislative session. The objective of these bills is to establish grounds, codified in State law, for franchisees to unilaterally change terms and conditions of franchise contracts in prescribed areas-such as product pricing, store hours, vendor purchases, operating standards, territories, renewals and transfers.

While such proposals may appear favorable to franchisees, their enactment will lead to "unintended consequences" that weaken franchisees’ equity in their businesses, damage brands, reduce product quality, limit franchisor assistance, increase incentives for litigation and jeopardize constitutionally guaranteed contract rights.