Franchise Alchemy

Improving Franchise Laws

Will California’s recent overhaul of its franchise relationship law lead to a proliferation of state franchise relationship laws? I doubt it. As I’ve written elsewhere, my guess is that the California law represents a specific congruence of interests that is unlikely to be repeated in other states.

Outside of California, the new franchise laws being enacted today have nothing to do with termination and non-renewal or good faith in franchise relationships. Instead, we are seeing new state laws declaring that franchisors are not joint employers of the franchisee’s employees. Such laws were passed in recent months in Texas (S.B. 652), Louisiana (HB 464), Tennessee (SB 475), Wisconsin (SB 422) and Michigan (SB 492). They are a reaction to the NLRB’s radical new joint employment standard in franchising.

Nevertheless, the rewrite of the California franchise relationship law is important. In an article in the current issue of The Franchise Lawyer, a publication of the American Bar Association’s Forum on Franchising, Rupert Barkoff calls the enactment of the new California law “a monumental event in the history of franchise law.” Mr. Barkoff points out that it is the first state relationship law enacted in 24 years. I prefer to view it as a modification of an existing law in a state that already had a franchise relationship law. Mr. Barkoff also notes that it may be the first time that franchisor and franchisee advocates actually negotiated a franchise law, thanks to Governor Jerry Brown’s role.

Mr. Barkoff’s fundamental criticism of the new California law is that he sees it as a possible trendsetter leading to a proliferation of similar state legislation, adding to the complex patchwork of state franchise laws. I disagree with this prediction, and only time will tell which of us is right.

But the more important point is that he views the California law as a setback to his vision of the ideal franchise regulation. In the best of all worlds, Mr. Barkoff would like to see a federal franchise law that preempts state franchise laws. He made the same point in an article he wrote in the New York Law Journal of March 17, 2015. He would like to see the enactment of a federal franchise law that would preempt the state laws, the creation of a private right of action in federal courts and possibly federal registration in place of state franchise registration.

I agree with these goals. And so do others. One of the more interesting franchise law programs in recent years was a plenary session in October 2013 at the ABA Forum on Franchising called “If I Had a Wizard’s Wand”, at which franchise lawyers spoke about what they would do to change franchise laws in the U.S. if they had unlimited powers to magically change them. In that program, Rochelle Spandorf advocated enacting a federal franchise law that would preempt all state franchise sales and relationship laws and provide for a private right of action. This would allow, for example, for a uniform definition of a franchise and uniform exemptions. Lee Abrams and John Dienelt largely agreed with these ideas.

A single national franchise law would make the U.S. a more appealing destination for foreign franchisors. It would avoid much of the problem of the inadvertent franchisor and simplify the launch of new franchise systems. New York franchise law, for example, is in serious need of an overhaul, and federal preemption is one way to get there.

Tom Pitegoff,