Foodservice's theory of evolution: survival of the fittest

Nation's Restaurant News, Jan, 1998 by Robin Lee Allen

"I'd never heard so much bitching in my life," Rosenberg recounts. So he and his peers anted up some money, created an agenda and elected officers. As envisioned, the group would promote and protect franchising interests from both the shadier figures giving the industry a bad name and the burgeoning attempts by government officials to regulate it.

"He founded it because franchisors could not get their ads into The Wall Street Journal until they cleaned up their act," Bill Cherkasky, who recently retired from the International Franchise Association, once recalled to Nation's Restaurant News. "He founded it as a protective organization ... and to make sure people viewed franchising as a clean business.

Government steps in

Since the inception of the International Franchise Association it has had its hands full. During the 1970s state and federal officials began scrutinizing the industry full throttle. Congress held hearings, and several state attorneys general pursued their own investigations. Meanwhile, chains like Chicken Delight gave them fodder.

Founded in 1952, Chicken Delight had made its founder, A.L Tunick, a tidy sum by the time it was sold to Consolidated Foods in 1965. Within seven years 800 franchise holders were suing the company. According to Luxenberg in "Roadside Empires," "They had grown tired of paying inflated prices for supplies, providing the company with huge profits. A federal court sympathized with the franchisees, and Consolidated Foods sold its right to the Chicken Delight trademark, having concluded that without the old arrangement on supplies the company was no longer worth holding."

In response to similar episodes, several states began enacting disclosure requirements to ensure that prospective franchisees understood the systems they were entering. California blazed the trail in 1971 when its Legislature passed a franchise investment law. Fifteen more states would follow suit in time. In 1979 -- eight years of study -- the Federal Trade Commission joined in the effort to protect franchise investors. It promulgated federal regulations requiring franchisors to disclose designated information about their operations.

"People were promising the world, and it was not a well-regulated industry," Dicke of Southwest Missouri comments. "Part of the push came from franchisors themselves. It was one of those things where disclosure laws were in everybody's best interests."

The effectiveness of the FTC rule has been in question ever since it was put on the books, however. While franchise advocates appreciate its intention, they question almost all else about it.

"The good news was the FTC rule, for the first and only time, created a uniform minimum standard of franchise disclosure applicable to all franchise sales throughout the United States," Robert L. Purvin Jr., says in his 1994 book "The Franchise Fraud: How to Protect Yourself Before and After You Invest." "Without the rule in 35 states there would be no franchise sale protection whatsoever."