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Coast-to-Coast, State Legislatures Shoot Down So-Called “Fair Franchising” Legislation

As state legislatures continue to wind down their sessions, the International Franchise Association is pleased to report that three states (California, Massachusetts and Vermont) firmly rejected legislation that would have negatively impacted the franchise industry. Far from being business havens, these states are widely viewed as being particularly tough on business. In fact, Thumbtack.com, in partnership with the Ewing Marion Kauffman Foundation, recently conducted a two-month survey of more than 6,000 small-business owners nationwide. According to the survey, California and Vermont received “F” grades and Massachusetts received a nothing-to-be-proud-of “D.” Additionally, in Chief Executive Magazine’s eighth annual survey of CEO opinion of Best and Worst States in which to do business, Vermont (38), Massachusetts (47), and California (50) were definitely economic “cellar dwellers.” California has the unwelcome distinction of once again being ranked the worst state in which to do business. Chief Executive’s survey reports California has an unemployment rate of 10.9 percent, which is higher than every other state except Nevada and Rhode Island and “[w]ith 12 percent of America’s population, California has one-third of the nation’s welfare recipients.”

Worst Business Climates
Legislatures from states with some of the worst business climates not approving “fair franchising” legislation speaks volumes to just how detrimental enactment of these bills would have been to franchisees, franchisors, and consumers and to these states’ economies.
In California, Assembly Bill 2305, “The Level Playing Field of Small Business Act,” was introduced at the 11th hour and was unprecedented in its scope and the degree of government intrusion related to franchise agreements. California already regulates franchise disclosure under the Franchise Investment Law and regulates the terms of the relationship between franchisor and franchisee under the Franchise Relations Act or FRA. The FRA is one of the more restrictive and stringent state laws governing franchise relationships. If adopted, Assembly Bill 2305 would have amended both laws, making it extremely difficult for existing franchise systems to conduct business in California and making the state an even more unattractive place to open new businesses. The legislation was burdensome, unnecessary and duplicative.
From its introduction, the bill seemed to be a solution in search of a problem with legislators on both sides of the aisle expressing their concerns that it “went too far” and would likely have unintended consequences. On April 24, the California Assembly Business, Professions and Consumer Protection Committee voted down the bill.
This fatally-flawed piece of legislation would have allowed substandard franchise outlets to continue offering inferior products and services to consumers. The end result would have been the degradation of franchise brands. Additionally, the bill also required identical treatment of all franchisees, which is nearly impossible in long-term relationships involving hundreds of franchisees.
The legislation also contained numerous legal terms, which were so general and subjective that it would have resulted in legal actions to resolve even minor disputes, at great expense to both franchisors and franchisees. Furthermore, it would have forced franchisors to “deal with” any franchisee association, even if multiple franchisee associations had divergent views on issues.
On the East Coast, the Massachusetts Legislature considered Senate Bill 1843, a “fair franchising” bill as well. It did so by sending the legislation to be studied during this summer. The Massachusetts Joint Committee on Community Development and Small Business will hold meetings on franchise issues this summer and has invited IFA to participate in these discussions. IFA will educate the committee members on the franchise business model and the harmful impact that expansion of government intrusion could have on the growth of franchising in the Commonwealth.
Rounding out the field of states, that considered franchising legislation, Vermont’s House Bill 694 died in the House Committee on Commerce and Economic Development on May 5.

0-and-3 Record
While on the surface, these various franchise bills appeared to be well-intentioned, the California, Massachusetts, and Vermont legislators viewed them as creating more damage than curing any perceived problems. In addition to needlessly pitting franchisees and franchisors against each other, perhaps the greatest harm of the legislation is to distract the franchise industry from working together on issues such as health care, immigration, regulatory and tax reform.
The 0-and-3 record of this type of legislation in 2012 has shown that legislators are reluctant to interfere in franchise relationships and support letting existing contracts between parties stand. While the trial attorney authors of California Assembly Bill 2305 and its ilk would have people believe otherwise, there have been remarkably few complaints related to franchise relationships. While both franchisors and franchisees face difficult issues during an economic downturn, it is obvious that overall the system works. Cooperation between franchisors and franchisees is what makes the system better, not laws written by officials who lack a full understanding of the franchising business model or by trial attorneys looking to make a quick buck by pitting franchisees and franchisors against one another by creating legal ambiguities and hostile business environments.

The so-called “fair franchising” legislation has appeared in several states, and may appear in more in the near future.

The so-called “fair franchising” legislation has appeared in several states, and may appear in more in the near future. However, IFA is optimistic that state legislators will continue to reject this type of legislation, which is an example of unnecessary government regulation of businesses, the kind that prevents job creators from doing just that and has held back a full economic recovery in the United States.
Consistent with its longstanding policy that self-regulation is preferable to governmental intervention, IFA will continue to oppose anti-franchise legislation, whose only identifiable beneficiaries appear to be trial lawyers. 
Dean Heyl is director, state government relations, public policy and tax counsel at the International Franchise Association. He can be reached at 202-662-0792 or dheyl@franchise.org.

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