By Deirdre Shesgreen
Legal Times
Monday, January 4, 1999
Susan Kezios clearly relishes her role as a noisy
and unyielding advocate for franchisees. So it's no
wonder that Kezios, president of the American
Franchisee Association, was happy when she and
her newly hired lobbyist managed to get legislation
to protect franchisees introduced in Congress in
October -- with bipartisan support.
That victory, albeit a small step in a long legislative
process, was made even sweeter by the internal
dissension that the bill seems to have sparked
among her archrivals, the members of the
International Franchise Association. The IFA
represents major corporations, such as
McDonald's and Kentucky Fried Chicken, as well
as many franchisees and suppliers.
At issue is the Small Business Franchise Act of
1998, introduced by Rep. Howard Coble (R-N.C.)
and co-sponsored by Rep. John Conyers Jr.
(D-Mich.), along with 10 other lawmakers.
Franchisees have long complained that they are
vulnerable to unscrupulous franchisors, who they
say hold the upper hand in contract negotiations
and are able to deceive and mistreat eager
entrepreneurs.
"If you own a McDonald's, Subway, 7-11 . . . or
any of the hundreds of other franchises in the U.S.,
and you have had problems with the parent
corporation, help may be on the way," Coble said
in a statement released when he introduced the
bill.
The North Carolina lawmaker declined to discuss
the legislation over the holiday break, but he said
in his initial statement that he would make a big
push for the bill in the 106th Congress.
"I don't know of a member of Congress who would
stand by while their hard-working small business
owners are left buck naked and defenseless
against bad faith tactics which have been used by
a host of corporations," he said.
In a typical franchise agreement, the buyer pays
an initial licensing fee (anywhere from a few
thousand dollars to $100,000) for the right to open,
say, a McDonald's or a Taco Bell, plus the cost of
whatever equipment and inventory are needed to
start the operation. Once the outlet is open, the
new business owner pays a percentage, ranging
from 3 percent to 15 percent, of his or her revenue
to the franchisor, and sometimes additional
advertising fees.
Right now, the only federal oversight comes from a
1978 Federal Trade Commission rule, which
relates only to the pre-sales process, not to
problems that crop up after a contract is signed.
And a 1993 study by the General Accounting
Office found that the FTC acted on fewer than 6
percent of the franchise complaints brought to the
agency.
"It's toothless," says Kezios, the AFA president.
With such minimal enforcement, she and others
say, franchisees are at the mercy of the major
franchise corporations. While many franchisees
are attracted by the prospect of owning their own
business and being their own boss, the parent
corporation still holds a tight -- sometimes
strangling -- grip after the contract is signed,
Kezios and others say.
In one case, a franchisee testified at a November
1997 FTC hearing about growing frustrations with
his franchisor, using the pseudonym "Steve Doe"
because he was so terrified of possible retaliation
by his corporate parent.
Something is "terribly wrong" when a businessman
has to testify anonymously about a franchise
operation, says W. Timothy Locke, a lobbyist at
the Smith-Free Group who is representing Kezios'
association, which comprises about 7,000
franchisees.
"This is a small-business entrepreneur who is
trying to get the American dream," says Locke, a
onetime aide to former Sen. Howard Baker
(R-Tenn.). "These people are plunking down on the
table huge quantities of money to buy into a
franchise. [But] they don't own anything."
As franchisee William Allen, who owns six
Kentucky Fried Chicken stores in Iowa, puts it,
"We're indentured servants."
One of the most contentious problems is
"encroachment," when a franchisor sells a
franchisee an outlet in a certain location, and then
a few months later, sells another outlet a few
blocks away to someone else. The new
establishment drains away customers and revenue
from the first owner and can be devastating for
franchisees, say Kezios and others.
But for the franchisor, it's often a boon. Ten percent
royalties from two stores, even if they each have
diminished sales, is still better than getting
royalties from just one store.
"McDonald's wants to have a Big Mac five minutes
away from every man, woman, and child," Kezios
says. "They don't give a flying rat's ass if they
devalue your asset" along the way.
The Coble bill seeks to address these complaints,
setting uniform standards of conduct for franchise
contracts. For example, the bill would make
encroachment illegal. It would also give franchisees
more freedom in choosing where they buy their
supplies and would require good cause for
termination of contracts.
But for the franchisees, the most important
element of Coble's bill comes with the creation of a
private right of action, so they could sue in federal
courts if a franchisor violates the law or the FTC
rule governing franchise contracts. Currently,
franchisees' only recourse is to file a complaint
with the FTC or to sue under a hodgepodge of
state laws.
Of course, the IFA has a different view of the
proposal. Matthew Shay, the IFA's vice president
and chief counsel, says that the bill would impose
such extreme restrictions on franchising that it
would basically kill the business.
"This legislation essentially would rewrite every
condition and every term in a franchise
agreement," Shay says. "We were surprised that a
conservative Republican like Mr. Coble and other
supporters of small business would lend their
name to this kind of legislation."
Days after the legislation was introduced, Shay
and other IFA members gathered in Boca Raton,
Fla., for an annual board meeting. The Coble
legislation was a hot topic.
"I was told this bill really messed up a good
weekend in Boca," says AFA lobbyist Locke, with
a hint of glee.
Shay and other IFA members say the entire
franchise association is united in its opposition to
the bill.
But the IFA's membership also includes a sizable
number of franchisees, who together own more
than 30,000 outlets.
Starting in 1993, the year that Susan Kezios' group
was founded, the IFA allowed franchisees to join --
a development that Kezios says was intended to
co-opt the franchisees and divide their ranks.
Ironically, however, it may have the unintended
effect of dividing the IFA, since some of its
franchisee members have at least a partially
favorable view of Coble's bill.
"The franchisees that were there [in Boca Raton]
felt there was nothing in [the bill] that the IFA
shouldn't support," says Allan Burr, an IFA
member who owns an A&W Root Beer franchise in
Lancaster, Wis.
Burr says that one franchisee, a Dunkin' Donuts
operator, argued that "it was time to support the
legislation, and if [the IFA]
didn't, the franchisees would have to split with the
IFA."
A Dec. 16 internal memo to the Franchisee
Advisory Council (FAC) Task Force, a panel within
the IFA, details a conference call on the Coble bill
and illustrates the franchisees' dilemma in taking a
position on the bill.
"FAC members need a position paper giving the
specific reasons why a franchisee would oppose
this legislation," the memo says. "We do not want
to be just a rubber stamp of the franchisor
position."
The memo also says that franchisees participating
in the conference call decided that the IFA needed
to take some concrete steps to address some of
the problems within the industry.
"The group felt IFA must come up with something
that incorporates the positive points of the
legislation and presents an alternative to franchise
legislation," the memo says. "It is not enough just
to be against the bill."
In the end, though, the IFA and its franchisees
came out strongly against the bill.
"There are a number of positive items in the bill
that as franchisees we could not dispute, but when
taken as a whole, our group felt more harm than
good would come," reads the FAC memo, which
noted that the group had gone through seven drafts
of a statement articulating the franchisees' position
on the legislation.
And whatever the IFA's internal deliberations were,
there's no question that the group is now preparing
for a fierce campaign. Shay says that some
lawmakers might have signed onto the bill without
fully understanding its implications, and he says
the group plans an intense education campaign to
explain to lawmakers how detrimental the bill will
be.
"After some consideration, they'll probably be
better informed," Shay says.
Already, the IFA has a lobbying advantage, since
its members include large corporations that have
in-house advocates and generous political action
committees.
For example, the McDonald's Corp. gave more
than $90,000 to federal candidates in the 1997-98
election cycle, and Tricon Global Restaurants,
which owns Kentucky Fried Chicken, Pizza Hut,
and Taco Bell, gave more than $50,000. (Both
Kezios' group and the IFA have modest PACs:
They gave out $600 and $4,000 respectively in the
1997-98 election cycle.)
To boost its firepower, the IFA has added three
high-profile hired guns to its lobbying team since
the Coble bill was introduced: Two former members
of Congress, Andy Ireland (R-Fla.) and William
Zeliff Jr. (R-N.H.) of Zeliff-Ireland & Associates, and
Alan Coffey Jr., the former chief of staff and general
counsel to the House Judiciary Committee, which
will have jurisdiction over the bill, are now on the
IFA's payroll.
Ireland was the ranking member on the Small
Business Committee before he left Congress in
1992, and even then was a sharp critic of
franchisees who wanted federal legislation. He
called them "whiny butts" who came crying to
Congress instead of taking responsibility for their
own business failings, according to a 1992
National Journal story.
Not much has changed. "I feel very strongly that
this kind of thing, then as now, is driven by
unsuccessful [business people]," Ireland says.
The Coble bill will just create a host of new
problems, he says. "The legislation seeks to make
the federal government a party to the contract, he
says. "It's big-time government intrusion. To label
this as a small-business issue is ludicrous."
The proposal is also fueled, Ireland contends, by
plaintiffs attorneys. "The litigation sector of society
sees this as an opportunity to make money for
their profession," he says.
Locke, who is working on the issue with his
partners James Smith, Alicia Smith, and James
Free, dismisses the notion that this will hurt the
franchise business. He notes that Iowa state
lawmakers passed a comprehensive franchisee bill
in 1992, and "not one franchise has quit doing
business in Iowa."
Nor, he adds, has the Iowa law sparked a wave of
litigation. The only lawsuit related to the bill was
one filed by McDonald's and Holiday Inn against
the governor, arguing the law was unconstitutional,
he says.
Locke concedes that he may be outnumbered.
After all, Kezios had to spend three years raising
funds before the American Franchisee Association
could even afford to hire Locke's lobby firm.
But Locke says he'll get all the firepower he needs
from the issue itself. "After I get done telling the
horror stories that so many franchisees have gone
through, it'll make HMOs look benevolent," he
says. "It will be so eye-opening to so many
members, we will really get some traction."
Besides, Locke says, the issue's political appeal
will be too strong to resist.
"Helping out the small businessman anytime is
good politics," he says. "Helping out the small
businessman or woman in a presidential election
year is great politics."
Heard in the Corridors . . . The Global Climate
Coalition has added new fuel to its lobbying
machine: Glenn Kelly, a former senior aide to Rep.
Jo Ann Emerson, a Republican from Missouri, has
moved to K Street to become the new executive
director of the coalition, an industry group that
lobbies on global warming issues.