Contributed by Tom Kent
After successfully passing through California’s Judicial Committee, the Level Playing Field of Small Businesses Act failed to pass through the California Assembly Business, Professions and Consumer Protections Committee. The legislation, which adopts the central themes of the Universal Franchisee Bill of Rights, has crystallized debate on several fundamental differences between franchisors, franchisees and their respective industry trade associations. While the debate in California of whether California’s existing franchise laws require revision will continue, the California legislature will take no further action this year.
Similarly, in Massachusetts the bill known as “An Act Further Regulating Franchise Agreements” was placed in study, thereby putting further legislative action on hold for one year. A vote on Vermont’s “An Act Relating to Franchise Agreements” is expected this year. Taken as a whole, the proposed legislation in Massachusetts and Vermont are not as comprehensive as the Level the Playing Field for Small Businesses Act. However, there are many similarities and consistent themes that echo the previously mentioned Universal Franchisee Bill of Rights. For example, the bills all contain provisions that would afford franchisees protection from “encroachment” by franchisors. In the Vermont and California bills, franchisees would have a cause of action against a franchisor for placing a new outlet in “unreasonable proximity” of an existing location if the new outlet has an adverse effect on gross sales. Of course, “unreasonable proximity” is not a defined term, leaving the determination of reasonableness to lawyers and judges in litigation that would likely follow passage of either bill. In Massachusetts, the proposed law states simply that if a franchisor develops a new location which has an adverse impact on the gross sales of an existing franchisee, the franchisor may be liable for damages. Note, there is no mention of proximity to an existing location! This ambiguity can only serve to tee up litigation in Massachusetts.
Another common theme in the bills is freedom of association. That is, the bills provide that franchisees would be free from prohibitions from associating with trade associations and that franchisors could not retaliate against franchisees for such association. I can’t see the franchisor community lining up in opposition to this concept. However, California’s bill takes one giant step further and would prohibit franchisors from “refusing to recognize and deal fairly with and in good faith with any independent franchisee association.” Can you say protracted litigation? If this language remains in the bill, you can bet that franchisors and their representatives will be voicing strong opposition to this overly broad and ambiguous “requirement.”
While the California and Massachusetts bills have failed to receive sufficient support for passage this year, I fully expect to see each bill resurface for future consideration. As promised, Fox will continue to monitor these and other legislative efforts that may impact the franchise community.