by franchisors allows them to act in an arbitrary and capricious manner
regarding termination, allows the franchisor to enforce covenants not to
compete under any circumstances and deletes the ability of franchisees to
independently source equipment.
Last year franchisors succeeded in passing a bill in the Iowa Senate that
made some twenty changes to the Iowa Act. However,Iowa franchisees managed
to get language in that bill which actually strengthened the original
encroachment provision. The language provided a franchisee could seek an
independent remedy for encroachment based on a violation of the duty of
good faith and fair dealing. Because franchisees were successful in
getting that provision attached to the bill, franchisors refused to pass
their own bill last year in the Iowa House.
This year the Iowa House again took up the Senate bill. This time,
franchisors succeeded in attaching an amendment to the Senate bill, which
stripped the favorable encroachment language and added an
exemption for Bandag, a tire recapping company located in Iowa. Bandag,
one of Iowa's largest employers, had requested this exemption after its
largest client, Michelin Tire and Rubber, dropped it. Even though a
majority of the House opposed the good faith changes, the House leadership
held the Bandag language hostage. Faced with the unpleasant choice of
offending Bandag or diluting the good faith protections, the majority of
the House chose the latter. The bill passed the House, then passed the
Senate as amended and the governor signed the bill.
What have franchisees learned from this experience? Mostly that
franchisors are determined to maintain dominance over them. Franchisees
not only have to fight for better legal protection of their rights they
must also constantly monitor the few statutory protections they currently
enjoy. Without such protection
franchisors will continue to act unreasonably and without regard to a duty
of good faith and fair dealing.
Franchisors have not, however, even with unlimited resources, been
successful in repealing the Iowa Franchise Act. Yet their paid lobbyists
return to Iowa year after year as is evident by the Bandag bill. They do
not give up. Franchisees must be equally determined. The lesson here is
that organization and
persistence is key in the legislative arena if franchisees are to be
successful in protecting their economic investments.
Just when we thought we
heard everything. . .
Admits That Encroachment Is "Bad Business"
. . but claims that the franchise agreement permits bad business
that it was "bad business" to encroach upon a franchisee's
territory, Interim Healthcare, Inc. ("Interim") argued in the
U.S. Court of Appeals in Chicago that it enjoys a contractual right to
encroach so long as its company owned offices are located outside the
franchisee's territory. Interim, the franchisor of a national home health
care network, provides each franchisee with a defined territory, and
claims that it strives to respect the franchisee's territory whenever
possible. However, Interim denied
contractual liability for encroachment, arguing that its franchise
agreement permits it to encroach even though encroachment is a bad
practice that it supposedly strives to avoid.
AFA Affiliate Member Carmen D. Caruso, the franchisee's lawyer, argued
that the franchisee's territory is protected by the franchise agreement,
because an alleged right to encroach was not included within the
franchisor's "reservation of rights" regarding the defined
territory. Caruso cited admissions by Interim that in drafting its
franchise agreement, Interim was intentionally vague on territorial issues
it sought to avoid "rigid rules" that might straightjacket the
system. Caruso argued that the implied covenant of good faith and fair
dealing prevented Interim from taking opportunistic advantage of a
deliberately vague agreement by encroaching in a way that even an Interim
vice-president labeled "unethical" in his pre-trial deposition.
AFA's President, Susan P. Kezios and Director of Public Policy, Samuel
Crawford, attended the appellate argument. They couldn't decide whether
they were more startled by Interim's admission
that encroachment is bad business, or by its argument that the franchise
agreement permits bad business practices. "They're using their
agreement to legally defend "unethical" and "bad
business" practices on its franchisees - that's the best argument yet
showing the need for the standards of conduct contained in HR 3308, the
Small Business Franchise Act," Samuel stated.
Special Note: Carmen Caruso will join AFA Affiliate Member attorneys
Michael Liss and Jeffrey Goldstein to discuss ambiguous franchise
agreements at AFA's Franchisee Leadership Conference in Coeur d' Alene,
Idaho, May 4-5th.
Legislation Spurred by Franchisor Abuses
to action by repeated complaints over the years from Canadian citizens,
the Legislative Assembly of Ontario held a series of public hearings in
March regarding newly proposed franchise legislation. Over the last
several years, elected officials in Canada had been receiving complaints
of bad faith business practices by franchisors against Canadian
franchisees. The hearings were finally convened March 6, before the
Standing Committee on Regulations and Private Bills and specifically dealt
with Bill 33, the Canadian government's proposed Franchise Disclosure Act.
Susan P. Kezios, President of the American Franchisee Association (AFA),
was asked to testify about the American experience with disclosure
legislation. Ms. Kezios told the Standing Committee that after 30 years of
experience with disclosure legislation in the U.S. it was clear that
disclosure, "does not work." She cited various states' enactment
of franchise relationship laws since the 1970's to fill the gaps when
disclosure was inadequate to deal with the opportunistic behavior of
certain franchisors. She also
provided as a further example that disclosure alone does not work by
mentioning the pending federal relationship legislation, The Small
Business Franchise Act, HR. 3308.
Ms. Kezios then gave examples of where the proposed Bill 33 didn't go far
enough to protect franchisee's investments. Specifically, she advised the
Committee that the proposed duty of good faith was
"unenforceable" as it was currently written. She suggested that
the Canadians learn from the American experience and go beyond mere
disclosure and into the relationship between franchisor and franchisee to
truly prevent abusive trade behavior. After presenting her prepared
remarks, the Standing Committee questioned Ms. Kezios further about
American franchise laws and their relevance to the problems being
experienced by Canadian franchisees.
Newest Association Members
Denny's Franchisee Association (DFA)
Colors on Parade Franchise Advisory Council, Inc.
Leadership Conference in Coeur d'Alene, Idaho
AFA is ready to welcome its members and friends to its Franchisee
Leadership Conference in Coeur d'Alene, Idaho May 3-5. The proceedings
begin with the Franchisee Leadership Summit on
Wednesday, May 3rd where franchisee leaders of independent associations
will participate in a round table discussion about their top issues and
concerns. They will also discuss how they are growing their independent
associations to the next level with regard to revenue enhancement,
membership recruitment and other activities.
Thursday, May 4th, Michael Einbinder, Esq., Rosen, Einbinder & Dunn,
P.C. and AFA President Susan P. Kezios will open the Franchisee Legal
Symposium which is subtitled, Smooth Sailing Ahead. Mr. Einbinder is the
Chairman of this year's Franchisee Legal Symposium. Nineteen lawyers and a
dozen other invited speakers will discuss with franchisees a number of
topics including the worst franchise contract clauses, wrongful
termination, ambiguous clauses in franchise agreements, forming an
independent franchisee association, encroachment, renewal, sourcing of
supplies, the sale or
purchase of a franchise and the sale or the purchase of a franchise
system, just to name a few.
The Franchisee Leadership Conference is being held this year at the Resort
on the Lake in Coeur d' Alene, Idaho. Coeur d'Alene is located just 30
minutes east of Spokane, Washington. Most major airlines have direct or
non-stop flights into Spokane. The Resort has a shuttle bus available ($40
roundtrip) for attendees who do not plan on renting a car. For more
information call the AFA office at 312-431-0545 or the Resort on the Lake
Establishes Online Franchisee Web Community
American Franchisee Association (AFA) has launched a new interactive
online Franchisee Web Community. AFA members can now create their own free
web sites, engage in online conversations with one another, obtain quick
access to industry news plus use many other customized online services.
This new member benefit will make it easier for fledgling franchisee
associations to communicate amongst themselves. Franchisees across brand
names can also communicate with one another using an exclusive interactive
online gathering place. AFA created the Franchisee Web Community with the
help of InfoStreet, a leader in the development of community web sites.
The Franchisee Web Community's suite of products and services include
internet dial-up access, web hosting, web-based email, classified ads,
discussion forums and private chat rooms.
Visit the Franchisee Web Community through AFA's web site at www.franchisee.org.