Brandau: Disagreeing to agree

As with most contentious issues, the arguments over Senate Bill 610 in California is looking like a barbell, with all the dramatic sound bites, marketing campaigns and white papers packed with valid points drawing all the attention to either end of a longstanding franchisor-franchisee debate. The legislation’s supporters and detractors both seem to raise the same question: Who is in charge of any franchised location –the franchisor that established the brand and system, or the franchisee who invested the capital to open the business and operates it every day? That bill won approval in the California Assembly last week and will be debated in the state Senate Wednesday. And while it will add some new rules of the road in California, I doubt it will settle this question that’s as old as modern franchising. Somewhere between S.B. 610’s supporters’ calls for “fair franchising” and its opponents’ eulogy for the franchise model as we know it lies the compromise to which this situation in California is most likely heading. It’s hard to sort out which side is right — or rather, which side is right about which part of the issue. What is helping me keep it all straight is by separating what I think is the key issue from some of the other noise about the “imbalance of power” in franchise agreements. You and I could get lost down that rabbit hole all day, talking about to what degree is it fair for franchisors to ask every letter of every rule in a franchise contract to be followed every day. For instance, Subway’s $5 Footlong and McDonald’s Egg McMuffin started as one franchisee’s experiment to drive business in a local market, and there were no provisions for those exact products in the franchise agreement. So some give and take benefits franchisors and franchisees alike. But today I talked to some of the bill’s supporters who had just arrived in Sacramento to lobby for S.B. 610’s passage in the Senate tomorrow. The main sticking point for the franchisee community, they said, is the bill’s provision to compensate franchisees for the fair-market value of their business if a franchise contract is terminated or not renewed. The bill would allow a franchisor to terminate a franchise contract early only in the event of a “material and substantial breach” of a stipulation in that contract. Otherwise, the brand must allow the franchisee to sell the franchise or transfer it to an heir for fair market value, or if the franchisee fights the termination in court and wins, the operator must be reinstated and paid for damages. Supporters of S.B. 610 said franchisees would still have the incentive to follow franchise contracts, because the law would not protect them if they willingly flouted a key provision to which they agreed. Franchisors, they say, would be kept a little more honest about reasons for ending a franchise agreement if the brand would be on the hook for fair market value of the business. Equally valid is the franchisor point of view, articulated by the International Franchise Association and others, that contracts need their stipulations to ensure that brand standards are followed, which is the whole underpinning of what makes franchising work. So what’s the middle ground likely to be forged, or forced? It will come down to franchisors and franchisees reaching agreement at the outset, before the franchise contract is signed. That’s the way franchising is supposed to work, and perhaps the law in California is an extra layer of red tape that brands and their owner-operators shouldn’t need. But it also might put pressure on both sides of the argument to respect the other side and head off contract fights and litigation before situations get that far.