Buying a Franchise

Is It Time for Change in the Franchise Regulatory System?

law--judicial_19-137273Australia recently revamped their franchise system, and Canada has made some changes, too. European regulations change, but the U.S. hasn’t made many changes at all in decades.

Franchise lawyer Rupert M. Barkoff wrote in the New York Law Journal that U.S. franchising law has essentially been static since 1979. There was a change in the disclosure rule in 2007 and a few changes in state laws, but, as Barkoff put it, “a Rip Van Winkle franchise attorney, having been asleep for some 35 years, could wake up today and, for the most part, continue where he had left off.”

In some ways, that’s good. We’ve seen a dramatic response to recent challenges and changes in the franchise arrangement since the National Labor Relations Board determined that franchisors and franchisees can be “joint employers,” and to redefining franchises as large businesses for the purpose of minimum wage laws. One of the primary concerns has been that franchisees will have signed agreements under one set of rules, and will have to deal with a new set of laws that will change that agreement.

Changing horses in midstream can be an unpopular idea.

Barkoff acknowledges this. “However,” he says, “this assumes that the existing regulatory scheme is effective.” Barkoff would like to see some changes. Reporting on a recent colloquium of lawyers and scholars on the subject of franchise regulation, he listed several changes he’d like to see:

  • Federal regulation rather than state by state regulation was, Barkoff said, surprisingly popular among the attendee at the colloquium. Clearly, it is simpler for franchisors who have franchisees in multiple states to cope with a single set of federal guidelines than to keep up with a variety of regulations in each state. Multi-unit franchisees with units in more than one state, an increasingly popular option, would also benefit. And franchise lawyers would be better able to keep up with regulations and to help their clients if regulations were uniform across the nation.
  • The FDD, or Federal Disclosure Document, seemed to the colloquium participants to be useful for helping prospective franchisees understand their legal rights. However, it didn’t give them much information about what the franchisee/franchisor relationship would be. Barkoff also felt that an FDD usually gives very little business information. He pointed to Item 1, which discusses the nature of the local market for a franchise. Often, he says, Item 1 simply announces that the field is competitive, and that there are other franchises offering similar goods and services. The prospective franchisee will probably have gotten that information by driving to the meeting.
  • Barkoff also wrote about the practice of “hotboxing,” or pressuring prospective franchisees to invest quickly by suggesting that the franchise offer is time-limited. In most states, franchisees must have the FDD for 14 days before signing an agreement, which gives you time to do your research before making a decision. However, the laws on this subject are not consistent across the country, as Barkoff would prefer.

Do you agree that these changes should be made, or are you more of the mindset of, “If it ain’t broke, don’t fix it”?


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