One doesn’t need a crystal ball to predict the paramount legal trend in 2013 – much more legislation affecting both franchisors and franchisees. In 2013, watch out for an avalanche of new laws proposed or implemented, at both the federal and state levels, that will dramatically impact franchise businesses in the areas of tax, health care, labor and employment and franchise relationships. In 2013, franchisors will need a comprehensive legal strategy to guide them through the morass of new legislation and regulation that puts sustainability at great risk.
One particularly thorny area of new legislation attempts to redefine the relative legal status of franchisors and franchisees. 2012 saw legislative efforts in various states including California, Vermont and Massachusetts that layer additional restrictions upon franchisors. For example, legislation introduced in California known as “The Level The Playing Field For Small Business Act of 2012” would significantly expand the protections afforded to franchisees under California’s Franchise Relationship Act and California’s Franchise Investment Law. The legislation, which adopts the central themes of the Universal Franchisee Bill of Rights, has crystallized debate on several fundamental differences between franchisors, franchisees and their respective industry trade associations. I believe this legislation will be the foundation for efforts in other states to introduce or expand legislation.
The proposed franchise legislation in Massachusetts and Vermont have many similarities and consistent themes that echo the Universal Franchisee Bill of Rights. For example, the bills all contain provisions that would afford franchisees protection from “encroachment” by franchisors. In the Vermont and California bills, franchisees would have a cause of action against a franchisor for placing a new outlet in “unreasonable proximity” of an existing location if the new outlet has an adverse effect on gross sales. Of course, “unreasonable proximity” is not a defined term, leaving the determination of reasonableness to lawyers and judges in litigation that would likely follow passage of either bill. In Massachusetts, the proposed law states simply that if a franchisor develops a new location which has an adverse impact on the gross sales of an existing franchisee, the franchisor may be liable for damages. Note, there is no mention of proximity to an existing location! This ambiguity can only serve to tee up litigation in Massachusetts.
Another common theme in the bills is freedom of association. That is, the bills provide that franchisees would be free from prohibitions from associating with trade associations and that franchisors could not retaliate against franchisees for such association. While freedom of association seems fundamental, California’s bill moves the ball further and would prohibit franchisors from “refusing to recognize and deal fairly with and in good faith with any independent franchisee association.” Can you say protracted litigation?
Stay tuned, we’ll work hard to stay ahead of the curve on these issues in 2013 so Franchisors can take proactive measures to address the ever changing landscape of franchise business.