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NRN editor and restaurant finance expert Jennings breaks down what you should be watching in the industry this week. Connect with her on the latest finance trends and news at @livetodineout and [email protected].
Franchisors and franchisees in California are at an impasse over a bill on Gov. Jerry Brown’s desk that aims to give franchise operators more protection against “abusive terminations.”
Senate Bill 610 was approved by state lawmakers in August but awaits the Governor’s action before a Sept. 30 deadline.
Franchisees are urging the Governor to sign the bill, saying it will allow small business operators to sell or transfer their business without fear of interference or retribution by the franchisor.
Franchise agreement terminations would be allowed only for “substantial and material breaches,” and franchisors will be prohibited from requiring franchisees to waive their rights as a prerequisite to signing an agreement.
Opponents, including many franchisors, argue that the legislation will set the stage for potential litigation and ultimately hinder franchise growth in the state.
Current law and the court system offer enough protections, opponents argue, and SB610 will allow substandard franchise operators to stay in business.
The legislation was championed in part by franchisees like Kathryn Slater-Carter, whose family was slated to lose $1.5 million after McDonald’s Corp. didn’t renew a franchise agreement on one of its restaurants in the San Francisco Bay.
Under current law, franchisors that terminate or decline to renew a franchise agreement must offer to repurchase a franchisee’s inventory.
Under SB610, franchisors that terminate an agreement without a material breach must compensate franchisees for the fair value of their business or provide them an opportunity to sell.
The International Franchise Association has launched an appeal to Gov. Brown, asking him to veto the bill and saying SB610 would open thousands of existing contracts to potential litigation.
Some might scratch their heads over IFA’s opposition.
The IFA represents about 12,500 franchisees. But its membership also includes about 1,320 franchisors, including very large companies like McDonald’s.
Matt Haller, an IFA spokesman, said the group’s membership, including its franchise operators, largely opposes SB610.
“We represent franchising,” Haller said. “Things that benefit franchisors benefit franchisees and the local economy.”
The association estimates that franchise businesses employ nearly 1 million workers in California at more than 82,000 franchise locations, many of them restaurants.
Haller said the fact that union organizations like the Service Employees International Union, or SEIU, have lobbied in support of SB610 indicates the legislation’s detrimental effect.
“They want to undermine the franchise model,” he said.
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The IFA’s campaign includes radio and online ads featuring franchisees proclaiming the detrimental impact of the legislation.
Meanwhile, the legislation has support from groups like the American Association of Franchisees and Dealers, which has circulated a petition urging Gov. Brown to sign the bill.
Both sides are taking to commentary pages.
Franchise operators like Lucinda Keller, owner of a 7-Eleven in El Cajon, Calif., wrote in the San Diego Union-Tribune that the legislation will “restore the basic fairness that’s been lost in the franchise sector” as franchisors impose “arbitrary rules” that fundamentally dictate operational practices.
“Even the most minor rule violations can lead to termination of our contracts, and news reports and firsthand accounts from my fellow franchisees illustrate how franchisors have used insignificant infractions as an excuse to terminate contracts and resell stores to higher bidders,” wrote Keller in an commentary last week.
An editorial in the Los Angeles Times, however, argues for a veto, saying SB610 wouldn’t add much to existing protections for franchisees.
“Lawmakers should be leery of rewriting contracts struck between willing buyers and willing sellers,” the editorial said. “As modest as the bill is, it would do more than just ensure that chains and operators act in good faith.”
The New York Times’ editorial board disagrees.
An opinion piece recently urged California’s governor to sign the bill, saying the legislation would “offset damaging trends in antitrust and contract law that have given corporations ever more control over franchisees.”
Equally important, the New York Times continued, the bill could provide momentum in the fight to raise the pay of franchise workers by proving that significant reforms to the franchise system are possible.
Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout
