Rationale for Rhode Island Legislation

In response to the Rhode Island franchise relationship legislation, Matt Shay of the IFA sent a letter to the legislators opposing the statute. Shay makes one important point, but buries that in much easily-rebutted cant.

Mr. Shay does have a valid concern with the ability for franchisors to enforce system standards. However, our 2004 Penn State Law Review article cites to dozens of instances from around the world where franchisors have engaged in abusive behavior such as the Rhode Island legislation is designed to guard against (The Rhode Island franchisees mentioned in our article were franchisees of Subway® Sandwiches). There is no easy answer to this conundrum, but to just throw our hands in the air and give up any attempt at curative legislation has not worked in the past.

Mr. Shay correctly points out the enormous economic impact of franchising, which the IFA has stated is growing at a faster rate than the economy as a whole. This is logical, since franchising is simply a method of purchasing capital and labor, and franchising enables purchasers of capital and labor to do so with less cost and far less concern for the public welfare and the public fisc.

Our article discusses (see esp. pp. 159-173) how franchising imposes negative externalities upon taxpayers; the German courts have even referred to franchisees as “employees in disguise” and recently courts in New York and Massachusetts have held that employers misclassified employees as “franchisees” to avoid statutory obligations.

Indeed, the very prevalence and growing impact of franchising on the citizens and economy of Rhode Island justifies legislative oversight.

Mr. Shay asserts in his letter that “one law cannot effectively regulate over 80 industries.” But we have laws regulating employment which are applicable to employers regardless of industry. Similarly we have laws regulating capital formation and deployment which are applicable regardless of industry.

Given that franchising is a method of raising capital and purchasing labor, it stands to reason that there is neither a conceptual nor practical bar to regulating the franchise industry.

Mr. Shay asserts that Iowa suffered economic damage from franchisors taking their business elsewhere in response to legislation. Even if we assume this to be true, this does not logically lead to the conclusion that the Legislature has no interest in protecting the citizenry; legislators deal every day with the difficult balancing of public interest and avoiding a “race to the bottom” economy. Rhode Island has wage and labor standards which are more stringent than in China or Malaysia, but this does not mean that the Legislature is about to abolish those protective laws to lure child-labor sweatshops to Providence.

Just as with labor legislation and securities legislation, we must carefully weigh competing public policy considerations. An often overlooked effect of legislation is prophylactic; the mere existence of a statutory paradigm will cabin “acceptable” behavior by the affected parties.

It may be that in the coming years Rhode Island will find it necessary to modify this legislation, but I would suggest that we give the legislation time to work and see how franchisor behavior comes to change once the initial flurry of franchise industry lawsuits dies down. No doubt Matt Shay is already ordering up the amicus briefs.

(A modified version of this posting was sent as a letter to Sen. Connors and Rep. Fox; concerned franchisees should take this opportunity to provide input and ensure the survival of this positive legislation)