News Briefs

The bill's sponsor, Assemblyman Jared Huffman, was quoted in the media as suggesting that he is willing to modify the bill to meet some objections raised by franchisors. However, Thorman said that IFA does not see room to compromise. “There's so much government intrusion on the franchisor-franchisee contract that I don't even see a point to work from on modifying the bill,” she said.

NASAA Releases Proposed Model Franchise Exemptions Second Time for Comment

The Franchise Project Group of the North American Securities Administrators Association (“NASAA”) has released a second draft of its proposed model franchise exemptions. NASAA is taking comments on the draft through May 16. The draft can be found at www.nasaa.org under the link “Regulatory & Legal Activity” (Regulatory Activity) under the tab for NASAA Proposals.

After receiving six comments, NASAA has proposed clarifications and/or additional flexibility in requirements for seeking exemptions in four areas: fractional franchises, experienced franchisors, accredited investors, and discretionary exemptions.

When the Franchise Project Group finalizes the model exemption, it will recommend to NASAA that it be adopted as a statement of policy. If NASAA approves, then it would only go into effect when an individual state affirmatively adopts the language.

Georgia Passes Franchise-Relationship Bill

Last month, Georgia became the first state to adopt a law that codifies franchising as a contractual business relationship, not an employment relationship. HB 548 was passed unanimously by both houses of the Georgia General Assembly. As of press time, the bill had not been signed by Gov. Nathan Deal (R), but expectations were that it would be signed. The bill can be found at http://www1.legis.ga.gov/legis/2011_12/sum/hb548.htm.

While the bill is significant in that it takes the franchisor-franchise relationship out of the employment relationship realm, it is actually very limited in its scope, several attorneys pointed out. The statute only states the franchisors are not responsible for paying workers' compensation insurance for franchisees, as they would be if the franchisees were employees. The statute does not address other employee matters for which an employer is typically responsible, such as state unemployment insurance, federal tax withholding, or following minimum-wage laws. “It solves a problem, but not the problem,” said one attorney who said he had reviewed the legislation but had not studied it in detail.

“The problem,” so to speak, is a series of lawsuits in which franchisees of cleaning systems have alleged that they are actually employees of franchisors: that is, that their franchise fee was, in effect, a payment to purchase a job. Lawsuits in California and Massachusetts have covered this ground in the last few years, and some judges have decided that some types of franchises are actually employer-employee relationships ' with Awuah, et al. v. Coverall North America, Inc. in Massachusetts being the most prominent example. In Awuah, the Supreme Judicial Court of Massachusetts found that cleaning franchisor Coverall was selling employment opportunities rather than franchises.

Litigation involving another cleaning franchisor, Apharetta, GA-based Jan-Pro Franchising International, raised business concerns in Georgia that led to legislation in that state. A Georgia court ruled that Jan-Pro's master franchise in Georgia could be sued as an employer under Massachusetts law, but that was overturned on appeal.

Given the potential scale of the matter if some types of franchisees are categorized as employees, the International Franchise Association (“IFA”) believes the law would be a significant development. “It's an important bill. It really clarifies that franchisees are not employees, but are independent contractors. They think of themselves as independent contractors ' they even obtain their own Employee Identification Numbers ' and franchisors think of them as independent contractors. So if the legislation is signed by the governor and becomes part of the state's code, then it's a valuable reference point,” said Dean Heyl, who recently joined IFA as director of state government relations, public policy & tax counsel.

The issue seems likely to rise in other states, which might spur further legislation to clarify what qualifies as a franchising relationship and what qualifies as an employment relationship. For example, the District Court for the Northern District of California has been considering similar claims by franchisees of Jani-King in Juarez v. Jani-King of California, Inc. (see FLBA “Court Watch,” page 5).

CA Fair-Franchising Bill Passes Judiciary Committee

After a public hearing that included testimony from franchisors and franchisees, the California Assembly Judiciary Committee passed a fair-franchising bill by a vote of 6-3 (one abstention) on April 17. Assembly Bill 2305, known as the Level Playing Field for Small Business Act of 2012, has been moved to the Business, Professions and Consumer Protections Committee, where it was scheduled for a vote on April 24. If it's passed, it would go to the Appropriations Committee for analysis of its financial impact, where it would again have to be passed before going to the full Assembly for a vote.

The bill would, among other things, strengthen franchisees' protection against terminations by franchisors and void provisions by franchisors to have disputes with California franchisees settled in the franchisor's home state. Also, it would impose a duty of good faith on all parties to a franchise agreement and a duty of competence on franchisors. It would increase franchisees' protections against territorial encroachment and would prohibit a franchisor from enforcing any covenant not to compete upon the expiration or termination of a franchise agreement.

“This is one of the worst pieces of legislation we've seen; it's quite misguided,” said Judith Thorman, IFA senior vice president of government relations and public policy. “And it's surprising that California, which is in one of its worst economic situations ever ' is considering legislation that would result in fewer jobs in the state.”

At a hearing before the Judiciary Committee, proponents and opponents of the bill stated their cases and drew a stark contrast in perspective. IFA, which formed a coalition with the Chamber of Commerce and other business groups, said that the bill would discourage franchising in the state, and the vague language of phrases such as “good faith” would lead to litigation.

On the other side, Keith Miller, chair of the Coalition of Franchisee Associations, was one of several representatives of franchisees who was invited to speak to the committee. “I am shocked to see the Chamber in opposition to this bill, wh[ich] allegedly represent[s] local small businesses,” he said.

Miller added that franchisees find contract renewals to be a particularly unfair aspect of their dealings with some franchisors, stating, “Today we have renewals that bear little resemblance to the initial contract, yet we are given the choice of accepting these renewals or give up our livelihood; a livelihood for which we may still have financial obligations, such as leases or loans.”

The bill's sponsor, Assemblyman Jared Huffman, was quoted in the media as suggesting that he is willing to modify the bill to meet some objections raised by franchisors. However, Thorman said that IFA does not see room to compromise. “There's so much government intrusion on the franchisor-franchisee contract that I don't even see a point to work from on modifying the bill,” she said.