Foodservice's theory of evolution: survival of the fittest

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

But there was bad news too, Purvin adds. As a practical matter, the FTC "had insufficient resources to monitor franchisor compliance or enforce the rule against violators," he says. He also points out that individuals still lacked the ability to bring private lawsuits if they are damaged by violations of the rule -- a fact that many franchisee advocates declare still needs to be addressed.

Furthermore, Purvin and others have pointed out that the FTC rule actually may do prospective franchisees a great disservice by creating the illusion that the federal government is regulating the industry closely. FTC officials themselves over the years have admitted a lack of resources to do a thorough job.

A big fight in the heartland

As states were adding disclosure laws to their books, several also began addressing the franchisor-franchisee relationship. Although 17 states now have such laws on their books, it was the passage of the Iowa Franchise Act in 1992 that ushered in a new era dedicated to a familiar-but-somehow-lost philosophy: cooperation.

Initiated by KFC franchisees pitted against their franchisor in the aforementioned seven-year legal battle over their contracts, the legislation sought to spare franchise holders from abusive franchisor practices. The bill touched on several of the hot-button issues that continue to plague franchising, including encroachment, transfer, sourcing, nonrenewal and termination. To the dismay of franchisors, it found strong support in the Iowa Legislature.

Franchisors immediately embarked on an ongoing effort to have the law repealed or changed. Lawsuits and lobbying have, separately, shown some parts of the law to be unconstitutional and some parts to need amending. In 1995 lawmakers made some changes. Another reform bill now awaits Senate action.

It is not surprising that franchisors and franchisees find different meaning in what happened in Iowa. For some franchisors and their advocates it became a fight for survival.

"It was the first time a legislative body superimposed its will on the business contract," says Matthew R. Shay, vice president of government and regulatory affairs and chief counsel for the International Franchise Association, which opposed the law's passage. "They said, 'We know your business better than you do and therefore we, the Legislature, are going to establish the terms of the contract.'"

Franchisees and their advocates maintain that what sets Iowa apart is not the content of the law, but the mere fact that franchisees were able to coalesce their forces and get the law passed.

"I think [franchisors] were offended that the grassroots efforts were so successful in '92," remarks Brent Appel, a Des Moines, Iowa, attorney who helped pass the law. "In fact, the Iowa law is not much different from those in 17 other states. But they hope to prevent any other franchisee-rights statutes from enactment."

Regardless, the events in Iowa did serve to raise the clout of franchises. Two national franchisee groups -- the American Association of Franchisees and Dealers and the American Franchisee Association -- blossomed. And franchisors, afraid that other states might follow Iowa's lead and aware that Capitol Hill was starting to watch, welcomed back a commitment to working together. The IFA, after 33 years of catering to franchisors only, opened its doors to some franchisee members in 1993. Words like "partnership" and "mediation" became franchisor buzzwords.