Janet Sparks at Blue MauMau attended the American Bar Association’s 36th Forum on Franchising, she writes:
Not all wizards are known for their magical powers. Some are identified by their skill and knowledge about a particular topic, said Joseph J Fittante, Jr., moderator of this year’s American Bar Association’s 36th Forum on Franchising plenary session, in introducing this year’s annual meeting of franchise lawyers.
Aptly named “If I Had a Wizard’s Wand,” the conference began with a selection of four legal wizards. ABA Forum on Franchising chair Fittante then asked each to provide the attendees of the opening session with what they would change in franchising if they could wave their magic wand.
There were two elements that were noteworthy about the session. “All our four wizards did not collaborate or share their ideas with one another before presenting their individual proposals to me: they worked in complete isolation,” said Fittante. “Second, other than each being a past chair of the Forum, our wizards’ experiences in franchising are quite diverse.”
Spandorf flashes wand to redo current broken system
Rochelle “Shelley” Spandorf of Davis Wright Tremaine was the first to wave her imaginary magical wand (pdf, 14 pgs). Historically, her experience has been evenly balanced between representing franchisors and franchisees. Spandorf emphasized her prudent nature. “. . . I am not the kind of wizard who goes off half-cocked flashing my wand just to show off my extraordinary powers.”
Then Spandorf explained franchising’s problem: “The current system is redundant, bureaucratic, and inefficient and its effectiveness for ridding fraud from the franchise sales process and leveling the playing field for franchisees has never been demonstrated, let alone fully tested.” She said no one defends the status quo. “Franchisors and franchisees universally agree on one thing: franchising would benefit from regulatory reform even if they don’t agree on its substance.”
The California attorney bravely asserted, “Let’s dispense with the question, should we continue to regulate franchising? Regulatory opponents cry that regulation is bad for business; franchises are private consensual contracts and government should not meddle in people’s private affairs.” Spandorf’s response? That is nonsense.
“Franchising’s remarkable success as a business model despite the problems with our broken regulatory system belies that public regulation is bad for franchising, she exclaims. “Furthermore, rescinding all franchise laws would shake the investment community’s confidence in the stability of franchise relationships, making it harder for franchisors and franchisees alike to obtain capital.” Spandorf said the question is not whether to regulate, but how to regulate, and offers a five point plan to replace the current regulatory system.
Read more at Blue MauMau
The message below is for logged in MFOA Members Only:
To: MFOA Members
From: Jim Coen, MFOA Executive Director
This is an interesting piece about how many franchise attorneys believe the federal franchise regulatory system is broken. I could not agree more with those attorneys its their suggestions to fix the problems that I have trouble with. The Federal Trade Commission introduced what is now called the Franchise Rule in 1979. It’s been amended a few times most recently in 2007. The FTC Franchise Rule is a disclosure rule, it requires all franchisors to disclose 23 key points about the franchise opportunity in the Franchise Disclosure Document (FDD), prior to someone making an investment in a franchise.
The FTC foes not check the disclosure document, it is up to the franchise buyer to have it checked, which can cost significant $ for proper due diligence. Most franchise investors don’t bother and accept the document for whats its worth.
I agree with Shelly Spandorf’s point that Regulations definitely has a place in franchising. Regulations are there to help markets run more efficiently to protect the marketplace from any one person or group from controlling the market for that particular commodity or from committing fraud. Yes, franchising is more of a commodity than it is an “industry”. For example there are many franchises to choose from.
In the article at Blue MauMau lists Shelly Spandorf’s suggestions. The suggestions illustrate one of the core problems in franchising, Franchise Attorney’s are not business people, they should seek advice from people in the business. Also, regulators can often go too far in order to solve a problem, regulations needs to be relevant to be effective. My comments are in Green.
Make a “2-2-1″ rule to ensure franchisor competency
- No company should sell franchises in the U.S. for a business concept without having owned and operated directly or through affiliates at least 2 outlets for at least the last 2 years. It is important that franchisors understand how to run the units, prospective franchisees should invest in franchise systems where the franchisor and its employees have significant experience running units. To regulate competence is going overboard, competence is identifiable in so many other ways and the FDD contains most of that information. Regulation is not needed here.
- Start-up franchisors must make a financial performance representation (FPR) in their FDD based on at least 12 months of “company-owned” performance data until they have sufficient franchisee data allowing them to base their FPR on franchisee performance. This is very good! The FTC should require all franchisors to make a financial representation in the FDD on the unit economics for operating a franchise unit!
Eliminate a myriad of State laws that franchisors have to navigate by having one federal franchise law
- A federal franchise law should preempt all state franchise sales and relationship laws and provide for a private right of action. Don’t hold your breath for federal law particularly with this congress. The best chance for franchise reform is in the states where the franchise owners hold the most power and have the most resources.
- The federal franchise law should authorize civil enforcement by states to protect franchisees that purchase franchises for a location or territory in the states. Franchise Cops? Sounds more like Keystone Cops to me. Not needed. A better marketplace is suitable enough.
Reform franchise disclosure and create national franchise registry
- Pre-sale disclosure should be retained, but the FDD should be overhauled. It was overhauled in 2007, the IFA and the franchisors have substantial resources and they were able to put pressure on the FTC to limit the changes.
- The federal franchise law will preempt the state registration system and establish a national franchise registry paid for by user fees. Again, don’t hold your breath, the best chance for franchise reform is in the states where the franchise owners hold the most power and have the most resources.
Establish statutory duty of good faith in franchising
- The federal franchise law will preempt state relationship laws and proscribe uniform unfair trade practices. Again, don’t hold your breath, the best chance for franchise reform is in the states where the franchise owners hold the most power and have the most resources.
- The federal franchise law will include a statutory duty of good faith. Good faith is next to impossible to regulate, what you can do is have regulation written that requires good faith to execute successfully.
Enforce through mandatory mediation then by dispute resolution in the franchisor’s home state Mandatory? I don’t like that word, but requiring dispute resolution to take place in the state that the franchise owner resides YES! YES! YES!
- The federal franchise law would provide for exclusive federal jurisdiction and award attorney’s fees to the prevailing party. Again, don’t hold your breath, the best chance for franchise reform is in the states where the franchise owners hold the most power and resources.
- Franchise parties would be required to submit to early neutral evaluation/mediation of franchise law and breach of contract disputes. I’m not sure?
- Franchisors may adopt their home state’s law as the franchise agreement governing law and require venue for disputes in their home state. No! No! No!
- Franchisees may not maintain a claim for franchise sales violations if they have not read the FDD or retained legal counsel before buying a franchise. This is what attorneys love to do, mandate that we use them, of course it’s helpful to consult franchise attorneys and business advisers, but mandating it? No Way!
Franchise attorneys can wish all they want, but the truth of the matter is to change franchising and create a more balanced marketplace in franchising, franchise owners need to organize. Organized franchise owners can and will achieve great results and the individual states are the best place to do it.
By joining and supporting the Maine Franchise Owners Association you have taken a big step without subjecting the brand you have invested your time, money and future livelihood on to unwanted attention or negative publicity. MFOA can fight for you. MFOA as an umbrella association protects you and your brand from negative publicity.
Thank you for your support of MFOA, please encourage your fellow franchise owners to join MFOA!
Jim Coen, Executive Director