Having taught a university course on franchising for more than a decade, I interact regularly with franchisors and franchisees. Senate Bill 129 – a bill to regulate franchising – has the laudable goal of protecting franchisees from exploitation by their much larger franchisors. But, as the old saying goes, the road to hell is paved with good intentions.
Advocates of the bill ignore that franchisees already enjoy ample protection. Franchising’s rise in the 1950s and 1960s helped companies such as McDonald’s and Holiday Inn become household names. When money is flowing, shady people soon arrive on the scene. By the 1970s, some franchisors were collecting fees from franchisees and returning nothing but empty promises. This led the Federal Trade Commission to tightly regulate the franchise relationship starting in 1979.
Today, forty years later, franchisors must provide transparency by law. Specifically, they must give potential franchisee a detailed Franchisee Disclosure Document (FDD) that lists 23 sets of information, including all fees the franchisor collects, the franchisor’s history (if any) of litigation, recent financial statements, and 20 other pertinent items. At the state level, the franchising relationship is governed by all laws pertaining to business fraud.
Many problems franchisees encounter are their own creation. FDDs often run hundreds of pages and franchise contracts are complex. Franchisees should have an attorney who specializes in franchise law review these documents before buying a franchise, but some do not.
Others are not aware of their rights. One franchisee lamented to me that her franchisor required her to buy bottled water from its endorsed supplier and the price was higher than what she would pay Sam’s Club for the water. She was unaware that the U.S. Supreme Court determined in 1971 that franchisees cannot be required to purchase an item from a specific supplier unless that item is central to the franchisor’s brand, such as KFC’s secret spices.
A new state law regulating franchising will not address these problems. It will, however, impose costs that ultimately trickle down to consumers and make it more difficult for franchises to thrive in our state.
A minority of states regulate franchising, including California, Oregon, and New York. Some franchisors avoid operating in such states because the added costs of doing business make success there less likely. Let’s not join California, Oregon, and New York in being hostile to franchisors who want to do business in Alabama.
Dave Ketchen serves as Harbert Eminent Scholar and Professor of Management at Auburn University.