State Fair Franchise Laws and Hoteling

Nobody Asked Me But... Remember When Franchisors Pulled Out of Iowa?

In hotel franchising, state laws make a big difference in deciding disputes between franchisors and franchisees.  This is particularly true because there are no federal laws requiring franchisors to abide by the common law duty of good faith in their dealings with franchisees; no fiduciary duty when the franchisor handles its franchisees’ money in pooled advertising funds; and no duty of due care that the franchisor must show to its franchisees.  It is the absence of national minimum standards of fair dealing that is responsible for most franchise litigation.

In other words, the only rules that apply in franchising are those the franchisor’s attorneys include in the one-sided license agreements, and the widely-varied state franchise laws.

It is also astounding to consider that the only regulatory body overseeing the franchise industry, the Federal Trade Commission (FTC), says that it “does not have the resources to follow up on all meritorious complaints”.  Remember that franchise industries employ more than eight million workers in over half a million small businesses.  Combined annual sales in these franchised businesses total more than $1 trillion in retail sales in the United States.

Existing federal law and most state laws afford only minimal protection to the local franchisee. 

The Iowa Franchise Investment Act

In 1992, Iowa enacted a comprehensive franchise law that protected the franchise owner and insured that the authority, rights and responsibilities of the business were fairly shared between the two parties.  The Iowa law said that:  

  1. the franchisee could give or sell a minority interest n the business to any family member without approval of the franchisor.  
  2. the franchisee could sell the business to anyone as long as the new owners meet the minimum standards the franchisor uses in picking other business owners  
  3. the transfer fees that the franchisor can charge cannot exceed the actual cost of doing the necessary paperwork.  
  4. if a franchisor opens a franchise within an “unreasonable proximity” of an existing franchise, the existing licensee has the right of first refusal of the new business or a right to compensation for any lost market share.  
  5. franchisors are precluded from not renewing a franchise agreement except for “good cause”.  
  6. franchisors must grant territorial exclusivity to franchisees  
  7. a retroactive clause which applied these provisions to the existing 16 franchised Holiday Inns in Iowa.  
  8. an Iowa venue was guaranteed for lawsuits.

The law was so abhorrent to franchisors that many of them stopped all franchising in Iowa until the law was repealed.  Both McDonalds and Holiday Inns (when Michael Leven was president) sued the State of Iowa challenging the constitutionality of the law, “quarantined” the state and cancelled all new projects in order to prevent the spread of the law to other states.  At least 70 other franchisors withdrew completely from Iowa.  Leven said, “we cannot risk a law like this being duplicated and have other states follow suit.”

Gradually, under the intense and relentless lobbying efforts of the Iowa Coalition for Responsible Franchising (consisting of the largest franchise companies), the Iowa Franchise Investment Act was revised and weakened.

For the first time since the Iowa fiasco, new state legislation being considered in Kansas and Tennessee offers the possibility of genuine fair franchising.  For franchisees who feel trapped inside one-sided franchise agreements, here is a wonderful opportunity: 

  • contribute to the election campaigns of the state legislators who introduced this legislation   
  • create and finance political action committees that can lobby for fair franchising laws in every state.

As Janet Sparks wrote in Franchise Times in April 2007,  

“Too many operators are battling abusive franchisors while they are trapped in unfair one-sided contracts.  Many are losing their life savings, their homes and their children’s college funds because of broken business models, frauds, mis-representations, and because of crafty franchisors who find other ways to make money off their franchisees.   Many franchisees are struggling with bankruptcy, divorce and, yes, even suicide, as we saw in the Quiznos system."

Quote of the Month   

“Fortune often pays you for the intensity of her favors by the shortness of their duration.  She soon tires of carrying any one long on her shoulders”  - Baltasar Gracian, Spanish philosopher (1601-1658)

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Stanley Turkel, MHS, ISHC operates his hotel consulting office as a sole practitioner specializing in franchising issues, asset management and litigation support services.  Turkel’s clients are hotel owners and franchisees, investors and lending institutions. Turkel serves on the Board of Advisors at the NYU Tisch Center for Hospitality, Tourism and Sports Management.  He is a member of the prestigious International Society of Hospitality Consultants. His provocative articles on various hotel subjects have been published in the Cornell Quarterly, Lodging Hospitality, Hotel Interactive, Hotel Online, AAHOA Lodging Business, Bottomline, New York Times, etc. If you need help with a hotel operations or franchising problem such as encroachment/impact, termination/liquidated damages or litigation support, don’t hesitate to call 917-628-8549 or email [email protected]

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