Can Franchisee Associations Serve as a Substitute for Franchisee Protection Laws?

Abstract

The most vital debate in franchise law over the last few decades has focused on whether state or federal law should protect franchisees from the potentially opportunistic behavior of franchisors. Several states, such as California, Massachusetts, and Vermont, are considering the adoption of laws protecting franchisees against franchisor opportunism. At the federal level, several franchisee protections laws have been introduced, but so far all have been rejected.Franchisor advocates suggest that franchisee protection laws are superfluous. Deeply ingrained in franchisor advocates’ opposition to such legislation is the belief that independent franchisee associations, namely trade associations formed by franchisees within a single franchise chain, serve as a sufficient barrier against franchisor opportunism. More specifically, franchisor advocates assume that by collectivizing a large percentage of the franchisees in the franchise system, an independent franchisee association improves the bargaining position of franchisees vis-a-vis franchisors. As a result, the association is assumed to succeed in negotiating contract terms that protect franchisees from franchisor opportunism and thereby eliminate the need for franchisee protection laws. This Article questions the idea that independent franchisee associations can prevent franchisor opportunism and otherwise serve as a substitute for franchisee protection laws. Focusing on the implicit assumption that such associations exist, or at least have the potential to exist, this Article argues that, in most cases, franchisees are unlikely to establish independent franchisee associations in the first place—mainly because under current law the expected costs borne by the franchisee in leading the establishment of an association exceed the expected benefits. That is, as federal and most state laws fail to adequately prohibit the franchisor’s retaliatory termination of the franchise or other reprisals against a franchisee association leader, the probability of such retribution is significant; conversely, the probability that the franchisee will form a successful and sustainable association is very low. First, franchisors often establish, fund, and control a competing franchisee committee, known as the franchisor advisory council, which is likely to reduce considerably the probability that an independent franchisee association will operate successfully. Second, franchisees normally have little incentive to join and actively participate in an already functioning independent franchisee association for several reasons, including franchisee free-riding, franchisee fear of retaliation by franchisors, and economic incentives provided by franchisors to franchisees for not joining such associations.