There is now pending legislation in the Commonwealth of Pennsylvania that would regulate the relationship between franchisors and franchisees. House Bill 1620 purports to require “responsible franchise practices” between the parties to a franchise agreement. However, the pending legislation continues a trend seen in many other states regulating franchising. In most state legislation, franchisors are painted with a broad brush as very large corporate entities in a superior bargaining position compared to prospective franchisees. The reality is that the majority of franchisors are not huge corporations. In fact, the majority have less than 50 units within their entire system. Of that majority, approximately 25% have less than 10 units! In addition, more than 50% of all franchised units are owned by multi-unit operators (franchisees owning more than one unit within a franchise system). Accordingly, the premise that franchising is an inherently unfair commercial relationship biased in favor of the franchisor is not applicable to franchise relationships generally. However, this is clearly the belief of the authors of House Bill 1620. The language of the proposed Bill makes it clear that the authors view a franchise relationship as a David and Goliath proposition. For example, the Bill states “a franchisor that simply acts in compliance with the terms of its franchise contract with a franchisee is not necessarily dealing with its franchisee fairly and in good faith.” Really? The Bill continues “the doctrine of unconscionability applies to a franchise contract” and “traditional common law doctrines have not evolved sufficiently to protect franchisees adequately from fraudulent or unfair practices in the sale and operation of franchised businesses, and significant contractual and procedural restrictions have denied franchisees viable legal recourse to protect their interest in the businesses.” Quite simply, the authors of the pending legislation do not comprehend the relative bargaining power of the parties to most franchise agreements.
The proposed legislation addresses subject matter ranging from issues of encroachment (“a franchisor may not grant or license a new franchise or otherwise establish a new channel of distribution for goods and services if the new franchisee is in unreasonable proximity to an existing franchised outlet” – cue Jaws soundtrack – enter plaintiff attorney for aggrieved franchisee), good faith and fair dealing, restrictions against competition, unlawful sales practices, restrictions against system-wide changes, renewal, termination and transfers of franchised units – just to name a few. No doubt, the pending legislation will be embraced by the plaintiffs’ bar in the Commonwealth of Pennsylvania as this legislation would undermine contracts negotiated between sophisticated business people and undoubtedly result in increased litigation. Otherwise, 1620 is yet another heavy handed attempt to regulate a business relationship authored by those who fundamentally do not understand it. I’ll continue to keep an eye on this bill as well as other state legislation that may impact franchising.