Overregulation in Iowa
A partner in the law firm DLA Phillips Fox in Australia cites Iowa as an example of what happens when a government over-regulates franchisors.
“We have seen the effects of over-regulation in various countries and notably also the US State of Iowa where the franchising sector shrunk substantially and franchisors deliberately avoid franchising into Iowa, resulting in lost contribution to GDP and job creation. Various attempts were even made to have the 1992 Iowa Franchise Act declared unconstitutional as it is considered to unlawfully interfere in contractual relationships,” Conaghan said.
Is Iowa overreaching? You be the judge. You can read more about the drama in Iowa franchise law over the past 15 years here.
Iowa (link to current regulations) has gone to great lengths to protect the franchisee. Below are examples of the protections:
- restrictions on the franchisors ability to refuse a transfer,
- imposes financial liability on franchisors who permits encroachment that adversely impact a franchisee’s sales,
- restrictions on “good cause” for terminating or not renewing the franchise agreement,
- franchisors cannot require franchisees to sue in another state,
- good faith required in honoring the franchise agreement,
- independent sourcing must be permitted,
- very limited non-competes after the franchise agreement is terminated, and
- franchise agreement must apply Iowa law
Some of the current political debate in the United States revolves around regulations, which really means imposing rules on private contracts. Governments must balance regulations with encouraging businesses to operate in your region. In Iowa, many franchisors simply choosing not to do business there.
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Australian Case: Withholding Consent to Transfer Franchise
Franchisees in Australia beware! A franchisor may withhold consent to transfer a franchise to a 3rd party if it goes against the interest of the franchisor’s known policies and future development plans. Read the case summary here.
When considering whether withholding consent to a transfer is reasonable, a court will assess the reasons advanced by the franchisor against the special nature of the relationship between the franchisor and its franchisees or potential franchisees.
A court will accept reliance on the franchisor’s policies and future franchise development plans. It is necessary to caution that in this instance the franchisor’s policies and plans were well documented and known. Accordingly, a franchisor attempting to rely on an overall system of policies and future development plans will have to ensure that those are documented and known to franchisees.
The ability of a potential buyer to comply with its obligations under the franchise agreement is only one of the factors a court will consider.
In this case, it was common ground that Zupps is a highly respected franchisee but this was outweighed by the franchisor’s broader policy considerations.
Franchisees intending to sell their franchises will be well advised to familiarise themselves with the franchisor’s policies and selection criteria.
Franchisors will also be well advised to document their policies, future plans and selection criteria and apply those objectively and in good faith when considering a franchisee request for consent to transfer of a franchise.
Whilst Justice Douglas clearly followed the likely approach to be adopted by Australian courts, it remains important to appreciate that the outcome will invariably depend upon the facts of each case.
How to Make Subway Look Like a Good Opportunity
Entrepreneur.com’s Janean Chun posted on article entitled, Can You Buy a Big Franchise? The topic seemed interested so I read it. The article essentially says you too can own popular franchise brands, if you meet the net worth requirements. She puts forth a Subway agent in California as a credible source, where he implies that Subway is a very stringent selector of franchisees who only looks for entrepreurs, not investors. What a hoot. Disgruntled franchisees would disagree.