Rep. Coble's Introduction of SBFA
Rep. Conyers' Introduction of SBFA
Testimony by a Franchisee
SBFA Complete Text
View SBFA in Adobe Acrobat (pdf)
Political Action Committee

• Mr. COBLE. Mr. Speaker, I rise today to reintroduce the Small Business Franchise Act of 1999.

• In the closing days of the 105th Congress, Congressman CONYERS and I introduced similar legislation aimed at leveling the playing field in the business relationship between corporations that sell franchises and the small businessmen and women who invest in them. Franchise businesses represent a large and growing segment of our nation's retail and service businesses and are rapidly replacing more traditional forms of small business ownership in our economy. As a result, franchise owners have become the heart and soul of America's economic engine and the backbone of local commerce.

• The franchisor/franchisee relationship is fundamentally an economic one where the objective of each party is to make money. Capitalism at its best one would think. Unfortunately, that is where the mutuality ends. In the context of a means to an end, the interests of the franchisee and franchisor are not always the same. For instance, because the parent corporations collect royalties on sales, not profits, it is in the economic interest of the corporate franchisor to open more outlets, even if it is at the expense of an existing franchisee. It is exactly this type of activity that has brought us here today.

• As a conservative Republican who supports smaller government and less regulation, many people have asked why I support franchise legislation. First of all, this legislation is not about bigger government and more regulation--it is about protecting freedom. The freedom for small business entrepreneurs to contract fairly, honestly, and without fear of retribution. Second, the Constitution provides Congress with the authority to regulate interstate commerce which Congress has already done for some franchisees by enacting the Petroleum Marketers Act and the Automobile Dealers Day in Court Act . I believe the time has come to apply these same standards to all franchise business relationships.

• One of the key provisions of this legislation applies the Duty of Good Faith and Fair Dealing to the franchise relationship. One would think that this obligation is inherent in all contractual relationships, however, because there has been inconsistency in judicial interpretation, clarification is needed. The Duty of Good Faith provision requires both the franchisor and the franchisee to act in good faith in its performance and enforcement of the contract. A Duty of Good Faith obligates each party to do nothing that would have the effect of destroying or injuring the right of the other party to obtain and receive the expected fruits of the contract. If the franchisees are willing to apply this provision to themselves, why are the farnchisors unwilling to do the same?

• There is also great concern among franchisees about monopolistic behavior among franchisors with respect to sourcing requirements. Many franchise contracts require franchisees to purchase equipment, fixture, supplies, goods and services directly from the franchisor or its subsidiary, thus eliminating competition from the system and driving up costs for the franchisees and ultimately the consumer. Under this legislation, competition would be injected into the procurement process, ultimately lowering costs for everyone. Along these same lines, franchisors would also be required to disclose any rebates, commissions, payments or other benefits resulting from the mandated sourcing requirement imposed on the franchisees. These kinds of ``kickback'' have been illegal in other industries for years, and the time has come to shine the light of day on these long-standing franchisor abuses.

• During the past 20 years, there has been tremendous change in the franchising industry, and as a result, I believe the time has come for Congress to examine this issue and level the playing field for small business franchisees across our great nation. The legislation that I introduce today, along with my distinguished colleague from Michigan, Congressman JOHN CONYERS, addresses the fundamental and necessary safeguards that this industry so desperately needs. This legislation, like the Automobile Dealers Day in Court Act and the Petroleum Marketing Practices Act , rights the imbalance that has existed for too long in the franchisor/franchisee relationship.
   

• Mr. CONYERS. Mr. Speaker, today I am proud to reintroduce, with my good friend from North Carolina, Mr. COBLE, the Small Business Franchise Act . This legislation represents hard work, and a good faith effort to strike an appropriate, bipartisan balance between the rights of franchisors and franchisees. These issues have been the subject of a hearing in this Judiciary Committee earlier this year, and the issues merit action by this Congress.

• Protecting the rights of franchisees is ultimately about protecting the rights of small business . They often face enormous odds and a daunting inequality of bargaining power when dealing with national franchisors. Unfortunately, the law often offers little recourse in the face of great harm.

• There is currently no federal law establishing standards of conduct for parties to a franchise contract. The Federal Trade Commission rule promulgated in 1979, (16 CFR §436), was designed to deter fraud and misrepresentation in the re-sales process and provide disclosure requirements and prohibitions concerning franchise agreements. The FTC maintains, however, that it has no jurisdiction after the franchise agreement is signed.

• As a result, in the absence of any Federal regulation, a number of complaints have been lodged in recent years, principally stemming from the fact that franchisees do not have equal bargaining power with large franchisors. The concerns include the following:

• (1) Taking of Property without Compensation. Franchise agreements generally include a covenant not-to-compete that prohibits the franchisee from becoming an independent business owner in a similar business upon expiration of the contract. This can appropriate to the franchisor all of the equity built up by the franchisee without compensation.

• (2) Devaluation of Assets. Franchisors often induce a franchisee to invest in creating a business and then establish a competing outlet in such proximity to the franchisee that the franchisee suffers economic harm.

• (3) Restraint of Trade. Most franchise relationships mandate that franchisees purchase supplies, furniture, etc. from the franchisor or sources approved by the franchisor. While it may be appropriate for franchisors to exercise some control concerning the products or services offered to franchisees, tying franchisees to certain vendors can cost franchisees millions of dollars, prevents competition among vendors, and can have an adverse impact upon consumers.

• (4) Inflated Pricing. Many franchise agreements specify that the franchisor has the right to enter into contractual arrangements with vendors who sell goods and services to franchisees that are mandated by the franchise agreement. It has been alleged that these vendors often provide kickbacks and commissions to the franchisor in return for being allowed to sell their products and services to a captive market. Instead of passing these kickbacks and commissions on to the franchisee to reduce their cost of goods sold and increase their margin, these payments, it is asserted, benefit the franchisor.

• While our nation has enjoyed an unprecedented economic boom, it is essential that Congress ensure that prosperity reaches down to the small businesses that make up the heart and soul of our economy. We have an obligation to ensure that the law governing this segment of the economy, which every American patronizes routinely is fair and balanced. I urge my colleagues to join with me and the gentleman from North Carolina in supporting this overdue and needed reform.

• Mr. MCKEON. Mr. Speaker, I am a recent cosponsor of H.R. 3308, the Small Business Franchise Act introduced by Representative HOWARD COBLE. Today, I include for the RECORD testimony from a recent Judiciary Commercial and Administrative Law Subcommittee hearing on this legislation. During this hearing a constituent of mine, Patrick Leddy, testified about his dealings as a franchise owner. Because of his very moving testimony, I became a cosponsor of this legislation. I wish to thank him for his words and include them in the RECORD today.

   

  STATEMENT OF PATRICK JAMES LEDDY, JR.

  My name is Patrick James Leddy Jr. I have owned and operated a Baskin-Robbins 31 Flavors franchise in Newhall, California since August 1, 1986, a total of 13 years. I am also a 26 year veteran firefighter with the Los Angeles City Fire Department. I purchased my franchised business to supplement my income, and to prepare my wife and I for our retirement. In 1996 my wife and I became very discouraged with the manner in which our Franchisor, which is a wholely owned subsidiary of a foreign corporation, was treating its franchisees. After careful consideration and after seeing sales at our fellow franchisee's stores plummet as a result of the placement of new stores and drastic changes to the system which we had originally purchased, we decided to sell our store.

  In February of 1997, three months after notifying Baskin-Robbins that we were interested in selling our store, we received a notification that Baskin-Robbins was considering a location for a new store located in a shopping mall, a mere two miles from my store and well within the market from which we draw a large number of our customers.

  Later that month my wife and I met with our district manager to discuss our ability to sell our store and the tremendous impact the new store would have on our existing store. To our surprise the representative from Baskin-Robbins agreed with us, and suggested that if Baskin-Robbins were to go forward with this plan, how would we feel if they were to purchase our store, and then sell both our store and the new store as a package to a new buyer? We agreed that this would be acceptable to us. Whereafter, the Baskin-Robbins representative offered us $40,000 dollars less than what I had paid for this store seven years earlier, and after an additional $70,000 dollars I paid for improvements which were required by Baskin-Robbins. We were appalled at this offer, but were advised by the Baskin-Robbins representative that we really should considert his offer, because if Baskin-Robbins does elect to place this new store at the proposed location, our store wouldn't even be worth that amount.

  Thereafter in April of 1997, and pursuant to an internal policy of Baskin-Robbins, which is not binding on Baskin-Robbins, and which is rarely followed by the company, I submitted to my district manager my response to this Baskin-Robbins proposed new location. He assured me that he would notify me of any developments as they occur, and that we would be notified promptly, once a determination had been made.

  In June of 1997, after several unsuccesfull attempts to learn whether Baskin-Robbins would proceed with the new store my wife called our district manager and explained to him that we needed immediate information on what the company intends to do about this new site, because we have had several prospective buyers for our store that were disinterested once we disclosed to them Baskin-Robbin's plan. The Baskin-Robbins representative advised us not to disclose the information about the new store to our prospective buyers.

  In July of 1997, our local neighborhood magazine publications reported that a new Baskin-Robbins would be open two miles from our store. We were shocked. Two days after this news story appeared, and after numerous telephone calls to Baskin-Robbins on our part, we finally received official notification from Baskin-Robbins about the new store.

  We later learned that Baskin-Robbins signed the lease for this new store on May 13, 1997.

  On August 5, 1997, after the underhandedness that we had felt from Baskin-Robbins, my wife and I decided that in our best interest we should retain legal representation to help us resolve the matter with Baskin-Robbins regarding the encroachment issue and the subsequent issue of our inability to sell our store.

  In June of 1998 the new store opened, with their grand opening celebration following in August. As you can see on the enclosed charts, sales at our store have drastically declined as a result, and have effectively terminated our ability to sell the store at a reasonable price.

  While attempting to resolve matters through our attorney, Baskin-Robbins has become increasingly hostile towards us. They have begun arbitrarily rating us as ``C'' franchisees, when in the past, we had always maintained an ``A'' or ``B'' rating. In addition, they have brought against us a lawsuit, contending that we were poor operators. One week before the inspection that is the basis for their lawsuit however, a mystery shopper trained and employed by Baskin-Robbins rated our operation superior, as did the LA county Health Inspector.

  In closing, I would ask your full support in addressing the obvious imbalance in the relationship between franchisor and franchisee through legislation. I am one Franchisee of many that are so frustrated in the way that we are literally forced to do business . Many franchisees I now that have lost their businesses, are going to lose their businesses, or are just plain hanging in there because there's nothing else they can do. I am extremely fortunate that I have another profession to fall back onto, while others suffer from intimidation, or being afraid to stand up and say anything, for fear that they will be strong-armed into submission, as Baskin-Robbins has attempted to do me. Please give us the tools that we need to survive in this giant corporate world, so that us little guys can continue making those big guys who they are. Thank you.

YES, I want to fund candidates who support issues important to small business franchisees. I understand that my contribution is not tax deductible and that a corporate check cannot be accepted. There are two easy ways to make a contribution either click on the Fax or Mail form below or add to you shopping cart with our secured transaction process.