California's "Level Playing Field for Small Business" Act of 2012 (AB 2305)

Was there ever a more appropriately-named state bill? The franchise playing field needs to be leveled because most franchise agreements are sharply one-sided in favor of franchisors who have the arbitrary power to:

  • impose higher fees
  • grant new franchises (similar or sister brands) anywhere at its sole discretion
  • disenfranchise exterior corridor properties
  • reduce service to franchisees
  • sell, merge or consolidate the franchise organization
  • impose exorbitant liquidated damages in the event of termination
  • restrict a franchise owner's freedom to sell his property
  • require personal guarantees from owners of franchised hotels
  • sell market data, including the names, addresses and preferences of millions of hotel guests
  • control the agenda and output of the in-house franchise advisory council
  • expand marketing and reservation funds without an independent audit and full disclosure
  • change rules regarding training, technology upgrades, frequency programs, guest discounts, required franchisee services, quality standards.
  • require the franchisee to make mandated upgrades and renovations
  • impose a "choice of law" clause that stipulates that any litigation will be tried in the home state of the franchisor
  • stipulate arbitration in the event of a dispute
  • impose a "no jury" clause in the franchise agreement

Fair franchising is not an oxymoron. 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 even when the franchisor handles its franchisees' money in pooled advertising funds; and no duty of due care that franchisors must show to its franchisees.  It is the absence of national minimum standards of fair dealing that is responsible for most franchise-related litigation. It is astounding 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 franchised 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.

In 1992, the state of Iowa enacted a comprehensive fair franchise law that insured that the rights and responsibilities were fairly shared between franchisors and franchisees. The Iowa law said that:

  • the franchisee could sell the business to anyone as long as the new owners met the minimum standards the franchisor used in approving other business owners
  • if a franchisor approved a new franchise within an "unreasonable proximity" of an existing franchise, the existing franchisee has the right of first refusal of the new business or a right to compensation for any lost market share
  • an Iowa venue was guaranteed for lawsuits

The law was so abhorrent to franchisor companies that many of them stopped all franchising in Iowa until the law was repealed. Both McDonald's and Holiday Inn sued the state, challenging the constitutionality of the law. At least 70 other franchisors withdrew completely from Iowa. 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 over the next few years.

Now, new fair franchising legislation has been introduced in California (AB 2305), the "Level Playing Field for Small Business", which having pased California's Judicial Committee is now under consideration by the Business Professions Committee. Send your letter of support to AAHOA (attention: Vice President Laura Lee Blake: lauralee@aahoa.com) as soon as possible.

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