NY and LA Times Essays Are Pravda-Like Editorials on California’s Franchise Bill

In an Editorial in the New York Times dated August 27, 2014, entitled “A Better Deal for Franchisees and Workers”, the NY Times recommends that Governor Brown sign California Bill, SB 610, which amends existing franchise legislation by providing additional limited rights to franchisees. In contrast, also on the same day, the Los Angeles Times Editorial Board, in an Editorial entitled “Franchise Bill Would Send the Wrong Message to California Businesses,” argued that Governor Brown should veto SB 610.

Although it is interesting to try to discern how and why two of the largest and most powerful newspapers in the country, with similar political ideologies, came to diametrically opposed positions on major franchise legislation, the more important issue for those involved in trying to ensure the future economic and legal longevity of franchising is to consider the reasons why neither of the editorials provided penetrating, careful or persuasive analysis. Indeed, upon closer scrutiny, it is clear that many of the arguments made by the respective Editorial Boards were implausible, overly-ideological and misguided.

Part of the problem with the NY Times editorial may be that, although it is seemingly directed by its title to SB 610, it in actuality appears to be instead about redistribution of wealth in the United States. It seems probable that the Board used the recent labor strikes in the fast food industry, as well as the California franchise legislation, as pretexts to discuss the wealth inequality issue.  Nevertheless, the NY Times Board, when it did discuss franchising, focused on the issue of franchise “control”, opining that “currently, corporations dictate virtually every aspect of a franchisee’s operations, while extracting heavy fees, royalties and other payments.” This, according to the Board, “boosts corporate profits” and “squeezes franchise owners.” In turn, according to the Board, this financial squeeze “leads to low wages” since “workers are paid not by the rich corporation but by the often struggling franchisee.” The Board then, without further analysis, jumps to the naked assertion that “the solution … is to raise worker pay through a more equitable distribution of corporate profits.”

Cutting through the rhetoric, it is possible to discern the following abstract warped thinking: (1) it is the job of government to obtain an optimal allocation of wealth in society; (2) an optimal allocation of wealth is achieved by obtaining a more equal allocation of wealth; (3) corporations in the United States, including notably franchise parent corporations, have too much of the wealth thus creating a current inequitable and sub-optimal allocation of wealth; (4) any mechanism or cause that will reallocate some of the wealth from corporations to workers is good public policy; (5) the recent fast-food labor strikes, which seek to garner higher wages for workers, if successful, would reallocate some of the profits from corporations to workers; (6) profits are ‘the same’ as wealth; (7) in order for non-company-owned fast food franchise outlets to pay more to workers, the franchisees would need to have ‘more money’; (8) one significant way to give franchisees ‘more money’ is for franchisors to relinquish some of the control they exercise over franchisees in franchise agreements; (9) the party with the ability to exert control in a franchise setting has the ability to impose relative costs on the other party; (10) in order to enable franchisees to have ‘more money’ vis-à-vis the franchise corporations, some of the costly requirements contained in and mandated by franchise agreements would need to be removed or modified; (11) any law that would diminish the ability of franchisors to demand, keep or add requirements and standards in a franchise agreement would lead, ceteris paribus, to less costly overall participation for franchisees; (12) any law that would decrease the costs of franchisees would allow them to pay more money to their workers; (13) every franchisee who obtains decreased costs of operations from a less costly franchise agreement will promptly, certainly and fully turn over all of this cost savings to its workers; (14) once the fast food workers in the United States are paid increased amounts directly by franchisees, the increased wages received by these workers will allow these workers to become much wealthier, thereby eradicating much of the inequality of wealth in the entire country.

The more detailed contentions about franchising in the NY Times editorial fare no better on the credibility scale than the sophistic abstract argument above. For instance, the Board asserts that the Bill would protect franchisees from reprisal for joining franchisee associations. In this regard, the Board stated that the Bill “would protect them from corporate retaliation for joining any of various franchisee associations devoted to addressing problems in franchising.” This is incorrect. The Bill merely provides that prohibiting such membership cannot be made an explicit part of a franchise agreement. Indeed, apparently unknown to the NY Times authors, in its early incarnations, the Bill had in fact provided such an explicit right protecting retaliation for joining a franchisee association; however, at the end of the day it was deleted.

Also, the NY Times Board states that there are existing trends in antitrust law and contract law that give too much control to corporations over franchisees. Again, this is inaccurate. There is nothing happening now or that has happened ‘recently’ in antitrust law that would lead to a conclusion that antitrust law has suddenly turned further against franchisees. The last large hit to antitrust theory and case law occurred during the Reagan Revolution in the early 1980s. After that era, during which courts and government agencies reaffirmed that economic efficiency is the only benchmark of the antitrust laws, franchisees were unwelcome plaintiffs in antitrust courts. This structural antitrust revolution has come and gone; the lack of market power of franchise systems in general under antitrust laws is an intellectual artifact.

The one point that the Board sort of got right was that the Bill would allegedly “bar a corporation from closing a franchise business for minor violations of the franchise agreement.” This is important, according to the Board, because of the potential existence of   a tactic that “some convenience store owners” say has been used by corporations “to shut down established locations in order to resell them at high prices to new owners.” Although such “churning” is a risk inherent in the franchise relationship, and although it occurs, this is not the real, sole, or most important justification for preventing terminations based upon trivial causes.

The reality, based upon my experience as one of the few remaining national lawyers truthfully representing only franchisees and dealers, is that there are far too many franchise and distribution terminations during the normal course that are based upon immaterial breaches. These terminations rob franchisees of their dignity as well as their weighty human and financial investments. Whether these problematical terminations have ill motivation (“churning”), or are motivated by simple personality conflicts between the franchisor and franchisee, or are caused by franchisor executives who believe that it is their personal divine calling to strictly and zealously enforce ‘the letter of the agreement’, the damage they cause to the economy, workers, franchisors, suppliers, consumers and franchisees is considerable and incalculable. Further, it does not appear that SB 610 deletes or modifies existing law that permits a good number of certain types of terminations – some of which might be viewed as trivial – based upon their mere occurrence without notice (e.g., financial issues encountered by franchisees).  These would appear to be protected and exempt from the new ‘material and substantial’ requirement in the Bill.

The Los Angeles Times Editorial concludes that signing of the Bill by Governor Brown “would send a potentially damaging message to businesses.” In contrast to the NY Times’ view of the Bill as providing relatively significant new franchisee rights, the LA Times seems to believe that the Bill provides no new rights and, as such, is superfluous, unnecessary and economically mischievous. The LA Times Board in this regard indicates that it is surprised to hear that some of those commenting on the Bill believe that it would “radically shift the balance of power in the world of franchised restaurants, stores and hotels.” This is because, from the LA Times’ perspective, the Bill “would write into law the kind of protections that franchise buyers already receive from courts or in typical industry practices.” One might now rightfully ask, ‘from which venerable sources did the Board get this incorrect fact?”  The LA Times Board answers “from lawyers active in the field.” These ‘unidentified lawyers in the field’ also provided the LA Times Board with additional phony facts:

  • “Today, chains don't have the right to terminate operators for trivial reasons, and if that happens, an operator can recover any losses in court.”
  • “In addition, operators that are stymied by their corporate headquarters when trying to sell their franchise can win damages in court if they can prove the chain acted improperly.”

However, after making this argument – that the Bill is gratuitous -- the LA Times Board then unexplainably deviates from its script and argues the opposite position: that the Bill actually contains identifiable new – and unjustifiably costly -- rights for franchisees. Specifically, the editorial points out that the Bill “would make it easier for operators to sell their franchises, bar chains from terminating operators over trivial disputes and provide them more relief if they were wrongfully terminated.” The Board notes that opponents of the Bill argue that “the measure would lead to more lawsuits and uncertainty about both sides' rights, which would discourage chains from operating in California.”

During the latter portion of its streak of schizophrenia the LA Times Board goes on to argue substantively against the Bill, seemingly taking the summary page verbatim out of the IFA’s briefing book. First, the Board stated “lawmakers should be leery of rewriting contracts struck between willing buyers and willing sellers.” Second, the Board opined that “No one is forced to buy a franchise.”  Third, the LA Times argued that “the involvement of the SEIU suggests that at least some lawmakers see SB 610 as a way to organize workers, not to protect operators from harm.” Long live Adam Smith with blinders.

Then, instead of escaping with simply having set out contradictory and conflicting views, the LA Times Board proceeds to compound the damage to the credibility of its editorial when it states: “As modest as the bill is, it would do more than just ensure that chains and operators act in good faith.” This statement, in its proper context, is nonsensical and inaccurate.

The standard for liability under current California franchise law is that franchisors cannot terminate without “good cause.” In turn, the Bill prohibits franchise terminations that are not based on “material and substantial” breaches of the franchise agreement. The new standard in the Bill is more protective of franchisees than is the current standard in existing legislation. However, a standard requiring that franchisors act in “good faith” (regardless of whether based on a free-standing claim or an implied one), theoretically imposes a much greater burden – justifiable or not -- on franchisors than is created under the Bill. However, apparently unbeknownst to the LA Times Board, the requirement that franchisors deal with franchisees in good faith was deleted from an earlier version of the Bill; accordingly, whether the LA Times was unaware of this deletion, or was actually aware of it but believed that the “material and substantial” standard was more burdensome than the “good faith” requirement, does not matter. The fact is that the editorial’s proposition is incorrect on both counts.

At the end of the day, the conclusions regarding franchising reached by both papers were in good part deficient, confused and jumbled, with the NY Times just eking out the LA Times for having concocted the most far-fetched, needlessly-complex and flawed model of economic and societal causation regarding franchise legislation. Unfortunately, the spiels being given by many, but not all, of the prolific lobbyists running up and down the corridors of various state legislatures around the country with pending franchise legislation are not of much higher quality. In situations where such obvious propaganda flows freely, money becomes the intellectual currency. Accordingly, franchisees and their organizations, which traditionally are cash-short, will continue to be the probable losers, in whole or in part, in too many legislative battles, especially where the SEIU is not an active participant and sponsor.

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Extra cash is the devil's tool for idle franchisees

Goldstein, "In situations where such obvious propaganda flows freely, money becomes the intellectual currency. Accordingly, franchisees and their organizations, which traditionally are cash-short, will continue to be the probable losers"

This is exactly why franchisors need to adequately hike royalties to franchisees. If the franchise owner has extra cash, he can spend it on associations and the like to defeat the lobbying efforts of the franchisor. Extra cash is the devil's tool for idle franchisees.

You're a tool

Extra cash is the devil's tool for idle franchisees because they funnel it to lobbying efforts. Wow, that's just a dumb comment.

So you better hike royalty rates, so the IFA can get more lobbying money from its franchisors to support their lobbying efforts.

I'm a proud tool

"So you better hike royalty rates, so the IFA can get more lobbying money from its franchisors to support their lobbying efforts."

Yes. That's right. Besides new royalty rates, other fees can be hiked as well.

The principle for new franchisors to understand is that franchisee profits need to be slim so that owner-operators work very hard. Look for signs that they are becoming too wealthy. Forming franchisee associations and lobbying for their own laws is one sign among many that more fees for franchisees need to be put into gear by the franchisor.

The good news is that not all of the extra fees need to go for IFA lobbying efforts. A lot of the increased fees paid by franchisees can be kept by the franchisor. It's a double win. A win for the franchisor and a win for the IFA's lobbying efforts.

California Wins

Governor Brown has vetoed the bill.


The right thing to do and for the right reasons