A Lawyer's Candid Discussion of Legal Challenges Franchise Operators Face
At the 
ABA Forum: A Discussion of Franchise Ownership in America with One of the Country's Premier Franchise Attorneys, Andy Selden
Reporter’s note: I sat down for a one-on-one interview with one Andrew Selden at the 30th Annual American Bar Association’s Forum on Franchising in Phoenix, Arizona. Selden was the chair of the ABA’s Forum on Franchising from 1985 – 1989. He is a shareholder of Briggs and Morgan, P.A., out of Minneapolis. To improve clarity and cohesiveness, my original interview has been supplemented with information from other articles and resources concerning Mr. Selden, which I then verified with him.
Having been involved in franchise litigation for over 37 years, Selden speaks candidly on the plight of franchisees, independent franchise associations, regulation and the new FTC franchise rules.
Don: As I have attended the Forum on Franchising workshops, I’ve noticed that the discussions overwhelmingly focus on franchisor perspectives. If a franchisee were here, I think they might be overwhelmed by how much thought is going into the franchisor side of the equation in contractual law and how little to the franchisee. Am I off base in what I'm seeing?
Mr. Selden: If the franchisee figures out that he as the little guy is represented by vastly outnumbered and overworked franchisee attorneys, then attending this forum would be helpful and instructional for him (or her). Think of the legal dimensions of franchising. The other side’s lawyers wrote the contracts. They wrote it unilaterally. They didn’t negotiate it. They probably won’t negotiate it, or not very much.
Is there a challenge for the franchisee?
There is a limited amount of statutory law that exists, most of which are designed to protect franchisees. But those laws, for the most part, were written in the 1970s. And they were designed to address problems that were in the marketplace in the 1960s.
That’s a long time ago. For a franchisee in 2007, the statutory law in 2007 doesn’t really help much with the business issues of today.
Third, the courts in this country have been extremely slow to bring common law principles and fair dealings to bear on franchise contracts. If anything, over the past 10 to 20 years, courts have become steadily more conservative and literal in interpreting and applying the franchise contract that franchisor’s high-priced lawyers wrote unilaterally into their own agreement clauses. So from a franchisee investor’s point of view, he is dead on arrival. On day one, first step, everything is against him.
Don: Very interesting. Is that changing? I mean, is there anything happening to tip the scale back to the franchisee so that the relationship isn’t so lopsided towards the franchisor?
Mr. Selden: I think so. For one thing, there are a substantial and growing number of franchisee associations. This is a long-term trend that I’ve seen grow in the past two or so decades. These associations have evolved to become autonomous trade associations, with professional management and resources ranging from legal advisors to finance, marketing, supply chain and strategy. The effect of this growth in independent franchisee associations will be in the long run to strengthen the economic effectiveness and competitiveness of the franchise brands in which these associations emerge and in which their franchisors link into them through a system of governance.
Franchisors will remain the trademark owners, but the decision-making authority is morphing into a de facto partnership with the system’s community of franchisee investors.
Don: From that statement, I gather that you think that the depth of talent in a franchise network often lies in its franchisees. I must say, that matches what I have noticed.
Mr. Selden: When you read the independent academic research on network businesses from which franchises are a subcategory, [you find that] the economists and academicians who have studied franchising have done powerful latitudinal studies, such as Spinelli and Birley, published about ten years ago.
It shows a very high correlation between the accumulative experiences of franchisees as contrasted with a very limited experience of executive management of franchisors. Their study proves, through vast amounts of economic data to back it up, that companies who fail to enthusiastically embrace that deeper well of know-how, through system planning that is incorporated early on during the growth cycle of the company, fail.
All of the academic research that I have seen, by economists and business professors, supports the notion that the competitive and economic success of networked businesses is highly correlated with franchisee satisfaction with their investments. That satisfaction is contingent on collaboration in which the franchisee has a meaningful participation in the system decision-making process that impacts their investments. This is basic human psychology and management. Systems that develop franchisee satisfaction through better participation in decision making will be more competitively successful and provide greater returns to all system stakeholders.
Don: Do you see a shift in the number of ABA franchise attorneys who are able to support these independent associations as they launch and grow?
Mr. Selden: Some. But the number of franchisee associations is still small. We aren’t talking hundreds yet. It’s still a very short list of attorneys who really understand independent franchise associations. If you were to sit down and calculate who would be on that list of attorneys representing franchisees who have experience with franchisee associations, there are probably fewer than 10 who are good at what they do.
Don: You also mentioned old statutory laws. It sounds like you think there should be better regulation to protect franchisees. What legal changes do you think need to be implemented?
Mr. Selden: One would think that established franchisors would welcome rational regulation of minimum practices, both to provide continuing assurance to investors of the security of a franchise investment and to level the playing field against the small number of franchisors that continue to engage in opportunistic and abusive practices, which tarnishes the public image of franchising, including perceptions of them. It is curious that so many large franchisors prove to be such extreme libertarians when it comes to this.
Don: If those things need to get done, who is going to do it? Will franchisee associations be able to help change statutory laws to regulate the industry?
Mr. Selden: I don’t expect a wave to modernize the statutes. Franchisee organizations still lack the financial resources and political focus to undertake such legislative initiatives.
Don: What do you think of the Federal Trade Commission’s revised Franchise Rule? What’s been left out that you would like to have seen?
Mr. Selden: There have been many positive changes in the rule.
Still, it is an astonishing failure of the FTC to not mandate disclosure of some measure of financial performance of franchise systems. Under the current regime, far too many franchisors mask widespread mediocrity of economic results of franchised operations, or outright failures of franchise investments, by withholding that information under the voluntary disclosure provisions of the UFOC and revised FTC Rule Item 19 (the part of the disclosure document that franchisors can declare average franchise unit profits but most do not). It is silly to the point of foolishness to mandate disclosure of all the rest of the Rule requirements, but omit the one category of information that really matters to investors.
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