Negotiating Success with AAFD Fair Franchising Standards

In 1994 a group of executives, entrepreneurs and attorneys gathered in Chicago to hammer out standards for franchise agreements to make them more fair and equitable. The goal was to help everyone’s bottom line.

Paving the road to Chicago were disputes between franchise dealers and franchisors that often resulted in bruising court battles that cost both sides money and time and prompted them to tuck defensive language into the next agreement.

In an atmosphere of increasing regulation and the rise of franchisee associations, the American Association of Franchisees and Dealers created the Fair Franchising Standards Committee. They wanted to make the franchising system work better for everyone, believing that a spirit of communication and negotiation led to better relations and business results.

The need for standards was clear.

As the first executive committee chair Keith Kanouse put it, “Increasing friction and litigation between franchisors and franchisees, in part caused by an inequitable franchise agreement, have not been good for the franchise community.”

The big problem was litigation.

As Toronto franchising attorney and AAFD board member Michael Webster put it, “You don’t leave it up to the last court win to define your business strategy.”

After a total of 50 people invested hundreds of hours, the AAFD created standards for everything from who qualifies for the Fair Franchising Seal that the AAFD confers annually, to whose franchise agreement best reflects the standards, to the definitions of intellectual property, trademark ownership, copyrights—a soup-to-nuts document addressing all aspects of franchising.

In announcing the standards in 2002, committee chair and attorney Richard L. Rosen said they were a beginning not an end. “For those of us who are still engaged in this task, the work remains both a challenge and an opportunity to leave a positive imprint on our field of dreams.”

Jim Coen, president of Dunkin’ Donuts Independent Franchise Owners, called the standards “the foundation for a fair and equitable relationship that fosters collaboration and negotiation among the parties.” The AAFD standards have established an unprecedented benchmark for comparing franchise agreements, Coen said.

At a time when there are 200 active independent franchisee associations on a landscape of some 3,000 franchise systems in the United States the standards are seen as a beacon of hope for fairness.

“The standards are a very idealistic attempt to change an industry,” says Webster. “The people that are signing on are giving their time and a lot of it because they believe it’s important to have an industry that runs fairly.”

Chris Schmitz, president of the Meineke Dealers Association and a member of the AAFD standards committee, said that brand chairman Ken Walker has been able to float ideas around the edges of standards meetings and get valuable feedback.  Schmitz said that trust has been built along the way between franchisees and Walker, chairman and chief executive of Driven Brands Inc., formerly Meineke Car Care Centers.

“The relationship we have with the franchisor has been aided by the standards themselves but also by sitting around the table,” Schmitz said. “The standards are very important. But it goes a lot deeper than that.”

Meineke is a clear success story. The 2001 winner of AAFD’s Fair Franchising Seal, it first had to endure a $309 million court judgment that included punitive damages.

“We were formed out of crisis,” Schmitz said of the franchisees’ association. But over time we have demonstrated our value.”

A federal court hit Meineke with a $309 million judgment in a class action suit that found the company and its personnel had diverted and misused contributions to a common advertising fund.

An appeals court denied the class action and ordered the company to return to the federal district courts to litigate hundreds of individual suits. That’s when Meineke decided to settle the suits and to come together with the franchisees to carve out a better future. Now the company, whose Fair Franchising Seal award was renewed in 2008, even sends new franchisees to training with the franchisee association.

“It’s not like we sit around and roast marshmallows and sing kumbaya,” said Schmitz. “But it’s much better even with something controversial to vet it and discuss it before it comes out and gets jammed down someone’s throat.”

Webster said that unfortunately it takes a crisis for many companies to decide to negotiate in earnest with franchisees, but the standards are an important step.

“The hope is that these standards will be adopted by people wanting to genuinely collaborate,” he said.

Schmitz said that when a company does embrace the standards, everybody wins.

“We’ve seen the needle move closer to collaborative than manipulative,” he said. “The only way to do that is to demonstrate success. They will come around even though it takes a shift in thinking. At the end of the day if it improves the bottom line they will think outside the box.”

Judy Rakowsky is a special correspondent for the DDIFO. This article was published in the July Edition of DDIFO Insider, a monthly newsletter for DDIFO members.