Iowa Franchise Investment Act

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.

Many franchisors stopped all franchising in Iowa until the law was repealed.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 lobbying efforts of the Iowa Coalition for Responsible Franchising (consisting of the largest franchise companies), the Iowa Franchise Investment Act was revised and weakened.