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BFS Capital Blog

New Franchise Laws and What They Mean to Your Franchise Business

July 30, 2015

There’s an expression about those who enjoy laws and fast food: If you like either, you shouldn’t watch them being made.

Maybe it’s not fast food, but it still holds true.

And if you own a fast food franchise business – or any franchise – you know it can be an incredibly messy business. While you may “own” your own business, it’s not the complete freedom you might get when running your own brand. And there’s an entire branch of law devoted to sorting out what rights you have or don’t have as a franchisee.

Since legal writing is about as exciting to read as food ingredients, you might not be caught up on the most recent and relevant legislation and legal decisions which affect you as a franchisee. So here is a quick review of recent changes to franchise laws, and how they may affect your franchise business.

California SB 610

This California bill was inspired by a McDonald’s franchise in Daly City with whom McDonald’s had opted not to renew their franchise agreement. It left the franchisee with no equity in the business after the lease ended, and when McDonald’s opted not to renew the lease on the physical building, it left them with no ability to sell.

The law would have prevented a franchisor from terminating agreements without demonstrating a “substantial and material breach … of a lawful requirement” of the agreement has taken place. It also would have forbid franchisors from preventing franchisees from joining franchisee associations, or prevent them from selling their franchises, though the franchisor would still have to consent to the sale.

The assembly and state senate passed it easily, but Governor Jerry Brown vetoed the bill.

What California SB 610 means for your franchise: It means that your franchise is still subject to termination of the contract without legal grounds. So if your franchisor doesn’t like your choice of ketchup, that can pull your license and you, much like Uncle Joe, gets NOTHING. Good day, sir.

This means you must take extra care in maintaining all the standards your franchisor has set out, since you have no right to equity. And it’s easy to pull your agreement, so make sure your burgers are dotted and your French fries are crossed.

NLRB Actions Against McDonald’s

Though not an official legal proceeding, last July, Richard Griffin – who serves as general council for the National Labor Relations Board – issued a statement proclaiming the NLRB would be considered a co-defendant in 43 labor complaints against franchisors. Meaning they are as responsible for wage complaints, overtime, and other employment-related issued that would traditionally be taken up with the NLRB.

What the NLRB actions mean for your franchise business: It’s not law of the land, per se, but is a statement on government policy. And not that you are free to pass the buck to your franchisor if your employees have issues with you. But it also means you may want to consult with your franchisor when said issues arise, as they now ostensibly have more to lose than they may have had before.

Patterson v. Domino’s Pizza

That said, in this case from last summer the California Supreme Court ruled that the franchisor was not liable in a sexual harassment complaint from a Domino’s employee. The franchisee – as the one who hired and continued to employ the manger in question – was wholly responsible for his conduct.

This differs from issues regarding wage and overtime complaints, as those are decisions that – while not dictated specifically by the franchisor – are greatly influenced by pricing and purchasing requirements.

What Patterson v. Domino’s Pizza means for your franchise business: Be careful who you hire, and take all complaints very seriously. Not only could it cost you in terms of damages from a potential plaintiff, but your franchisor may decide to wash its hands of you altogether.

Steak n Shake v. GLOBEX

This Colorado case involved a franchisor near Denver who believed the above-average operating costs of the area necessitated raising the company’s $3.99 maximum menu pricing. They asked the company for permission to do it, were delinked, and did it anyway. As a result, Steak n Shake pulled their franchise as GLOBEX, the franchisee, sued.

Steak n Shake’s motion for summary judgment was recently granted, this after an injunction granted in Steak n Shake’s favor preventing Globex from continuing operation of the restaurants. Basically, it looks like Steak n’ Shake may be winning this one.

What Steak n Shake v. GLOBEX means for your franchise business: Pricing is huge part of a brand’s strategy, and not yours to play around with. When considering starting a franchise, realize that those prices are – in most cases – going to be fixed, and you must make all your business decisions accordingly.

Naik v. 7-11

Though this case is still pending, a New Jersey federal judge threw out a discrimination claim by several Indian-American franchisees, but kept their overtime and wages claims in the case. The franchisors claimed that the exceptionally strict controls 7-11 kept on their franchises – from uniforms to employee appearance to television volume – essentially made the franchisees employees.

As such, they were entitled to fair wages and overtime claims, even as business “owners.” Though no judgment has been issued in this case, it does mean that the judge at least sees cause to the complaint.

What Naik v. 7-11 means to your franchise business: Nothing yet. And it will depend greatly on how strict your franchisor is. But if you feel like an employee, you might be one. So watch this one closely to see if those 28-hour days you’ve been working might actually rate some overtime pay.

Fair Franchise Act and SBA Franchise Loan Transparency Act

These two just-proposed acts by Rep. Kevin Ellison (D-MN) aim to do close to what the failed California law did and give a little more protection to franchisees.

The Fair Franchise Act prohibits mandatory arbitration in contracts. It also forbids franchisors from barring franchisees from freely discussing their experiences, and allows them to participate in franchisee associations without franchisor retaliation. It also requires that franchisors act in good faith, something included in pretty much every contract on Earth EXCEPT franchise agreements.

The SBA Franchise Loan Transparency Act requires franchisees that receive an SBA-guaranteed loan to obtain average unit revenues from the franchisor’s Franchise Disclosure Document (FDD). These numbers would also need to be broken down by average unit volume for first-year franchises for the past five years and average unit volume of all franchise locations, sorted into the top quarter of all franchises, the bottom quarter and the aggregate of the two quarters in the middle.

What the Fair Franchise Act and SBA Franchise Loan Transparency Act means to your business: Again, nothing now. But if these ideas sound like things you could get behind, contact your local congressman and franchisee association to let them know it’s an issue that matters to you. Though the road between a proposed bill and a passed one isn’t short, the more public support people know it has, the better the chances of passage.

We hope that our quick review of recent changes to franchise laws provides some clarity. As always, we would advise that you consult an attorney or legal counsel before making any important decisions for your franchise business.