January 17, 2012

Recent Trends in Franchise Relationship Laws


This article was originally prepared as a paper given at the Annual Conference of the International Bar Association in Dubai, October 2011.

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1. Introduction[1][2][3]

Beginning in the 1950s, with franchisors such as McDonald’s, Midas Muffler, and Holiday Inn, the franchise business model has become a popular growth vehicle in both North America and worldwide.  That said, the coming of age of business format franchising in the United States during the mid-20th century brought with it abuses by some opportunistic franchisors seeking to line their pockets at the expense of their franchisees.  During the late 1950s and throughout the 1960s aggrieved franchisees sought to restrain this opportunistic behavior by bringing actions for redress based on various theories of contract, tort, unjust enrichment, and fiduciary law, and on statutory anti-trust law and securities law.

The franchisees and the regulators, however, found the results largely unsatisfactory, leading to intervention by certain of the states in the U.S., the U.S. Federal Trade Commission, and the Province of Alberta in Canada in the form of franchise disclosure and registration legislation and regulations in the early 1970s.  This initial attempt at franchise regulation was directed at the franchise granting process, and attempted to level the information playing field.  Pre-contractual disclosure regulations require franchisors to provide prospective franchisees with certain information about the franchisor, its affiliates, existing and former franchisees, the franchise business, the franchise contracts, the money, and other matters to enable the prospective franchisee to make an informed decision about investing in the franchise.  Today, this form of regulation continues to dominate the global franchise regulatory landscape.  However, over the years some jurisdictions have also enacted relationship legislation in addition or as an alternative to disclosure and registration laws.

The rise of relationship laws recognized that while disclosure laws provided protection to the franchisee prior to entering into a franchise agreement, they offered no remedy against opportunistic conduct that extended beyond contract formation.  Franchise relationship legislation, then, was directed at the continuing business relationship of the parties after the franchise agreement was signed.  It was intended to restrict franchisors’ discretion in certain areas of contract performance which the regulators thought were of critical importance to franchisees; such as, the duty of good faith and fair dealing, franchise transfers and renewals, termination, procurement, and encroachment on franchisee territories.  Today, with a handful of exceptions which are “disclosure only” regimes, the majority of franchise laws and regulations around the world contain both pre-contractual disclosure and on-going relationship elements; a few countries have opted for the “relationship only” approach.

What follows is an overview of franchise relationship laws around the world and the aspects of the franchise relationship these laws typically address.  While not the focus, this paper will also examine the impact of self-regulation, industry specific legislation, and Australia’s Commissioner Model on the franchise relationship.  In the conclusion, the analysis will rely on the unique characteristics of the franchise model in an effort to provide the reader with conclusions and lessons learned.