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Irwin Barkan

A steep price

For franchise owners, the parent company holds all the power

(Brian Taylor for The Boston Globe)
By Irwin Barkan
July 1, 2011

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YOU MAY not realize it, but the cup of coffee you buy from Dunkin’ Donuts, the Happy Meal you order at McDonald’s, and the SUV you lease from GM, is delivered to you by a small business owner who has purchased the rights to market these products from the parent company. Franchising now accounts for over 50 percent of retail sales in this country, and its growth rate exceeds the overall economy.

But participation in franchising comes at a steep price - franchise agreements are often inequitable, with the franchisor holding all the power. Although franchisees supply the capital and hard work that make this system thrive, they are afforded few legal rights. State lawmakers are considering two bills that would change that.

Most franchisees are not allowed to change a word in the franchise agreement, meaning they are signing a contract of adhesion, a legal concept that disappeared from commercial contracts a century ago but is still alive and well in franchising. The covenant of good will, which requires contractual parties to act in good faith and deal fairly with each other, is implied in every commercial contract, except in franchise agreements where the express terms contained in them typically override it.

And these express terms are not pretty. Most franchise agreements explicitly state that the relationship between a franchisor and a franchisee is not fiduciary. A fiduciary relationship would stipulate an ethical relationship of trust between two parties. But even though franchisees are required to make substantial investments into a franchising system, often their life savings, franchisors are unwilling to grant them this status.

Franchise agreements often include “integration’’ and “acknowledgement’’ clauses, which stipulate that the agreement contains all the obligations between the parties and that the promises made in the sales process must be forgotten. Franchisors are under no obligation to renew a franchise agreement, which means that a franchisee is essentially renting a business, not buying one, as touted in franchise marketing. And franchisors typically have the right to locate new stores anywhere they please, even if a new store encroaches on an existing franchisee and damages its business.

The worst inequity of the franchise agreement, though, is the power of the franchisor to terminate the agreement, almost at will. While franchise agreements provide scant provision regarding the default of the franchisor, franchisee default is detailed for pages. Under typical default provisions, a franchisor can terminate a franchise agreement within seven days if a “notice to cure’’ has not been satisfactorily remedied in the opinion of the franchisor. A termination of the franchise agreement means the franchisee has lost his entire investment, often in the millions of dollars, and that the franchisor now is in possession of an asset it can re-sell to someone else.

As a former franchisee of Dunkin’ Donuts, I learned the hard way that the franchise agreement can be a business disaster for a franchisee. During my involvement with the company, it sued more than 500 of its own franchises. When I eventually became its target, I found out that I had almost no rights in protecting the sizeable investment I had made in its franchising system.

A bill sponsored by Senator Brian Joyce of Milton would provide franchisees with better legal protections, including an improved process that will protect franchisees from termination without cause as well as the right to take the parent company to court.

There are about 14,000 franchise businesses in the state. We need to make sure they have greater legal protections so they can continue to make the doughnuts and Happy Meals.

Irwin Barkan is a former franchisee of Dunkin’ Donuts and the author of “Dunk’d, A True Story of how Big Money has Corrupted the Franchising Industry.’’