Hungry Jacks Franchisor Supports Franchisee Rights
In an interesting franchise story about termination and renewal, from Australia, we learn that:
One of Australia's largest franchise operators is pressing the Rudd Government to introduce a good faith clause as he fights to stop the forced closure of three fast-food outlets .Hungry Jack's owner Jack Cowin says a loophole in the law means 62,000 franchises across Australia can be deprived of the value of goodwill they build in their business.
Mr Cowin and other operators say franchisers should be obliged to negotiate and act "in good faith" and that existing laws do not reflect the market practice that agreements are usually renewed.
Mr Cowin's Competitive Foods is locked in a fierce battle with Yum Restaurants International, which owns the Kentucky Fried Chicken and Pizza Hut brands.
In addition to being a franchiser for Hungry Jack's, Cowin operates the KFC franchises in Western Australia and the Northern Territory.
Last year, he closed a KFC outlet in Rockingham after Yum refused to renew the franchise. He said yesterday Yum was poised to force the closure of another three in coming months.
In each case, he said, Yum was not prepared to recognise goodwill established over 30 years.
Burger King in Australia go under the name "Hungry Jack's" because Cowin or entities controlled by him own the trademarks rights to Burger King. How this happened is a fascinating story about franchisor indifference to its trademarks!
Requiring that franchisor's provide evergreen rights of renewal as a matter of public policy is an overreach, in my opinon.
What Cowin should be asking for something like the termination/renewal provisions in the California Franchise Relations Act which provides for two interesting statutory duties.
First, a franchisor cannot fail to renew a franchise for the purpose of converting it, even temporarily, to a company store. This does not effect the franchisor's right of first refusal on a purchase.
Second, if the franchisor elects not to renew and doesn't have cause to terminate, then the restrictive covenant not to compete or offer the same type of business is not enforceable.
This type of statute, which allows a franchisor not offer renewals based on its own business model, prevents opportunism by the franchisor because if their decision not to offer renewals is done in good faith, they cannot have a legitimate business reason for enforcing their non-compete clause.
The California Franchise Relations Act would solve the problems raised by non-renewal, raised by Competitive Foods Australia's submission to the Productivity Commission, in Australia.
In the executive summary, the authors Tim D. Castle B.Ec, LL.B. (Syd), B.A. (Hons) (UNE); Zali Steggall OAM, B.A., Dip. Law; Professor Andrew Terry LLM (Hons)., state:
1. The law in Australia does not provide any or any adequate protection for tenants and franchisees who lose the goodwill they have built up in their businesses when landlords and franchisors fail to renew their leases and franchise agreements upon expiry.2. Economic literature in the franchise context has long recognised the problem of franchisor opportunism, in which the franchisor exploits its rights of termination and non-renewal to deprive the franchisee of economic benefits which the franchisee has established in relation to the business and business goodwill.
3. Whilst existing Australian tenancy and franchise law responds to the problems associated with wrongful termination, it does not currently respond to the problem of non-renewal, which can be seen as a form of "passive termination" that does not require any default to have been committed.
4. The problem can be illustrated by the "churn" and "appropriation" cases. In these cases the landlord or franchisor derives a financial benefit from their failure to renew the lease or franchise agreement, by taking advantage of the goodwill built up by the former tenant or franchisee without having to pay for it.
5. A change to the law is needed to solve the problem of non-renewal, and bring it into line with the law relating to termination. This should be done by requiring landlords or franchisors to grant a renewal of an existing lease or franchise agreement unless they have a good faith reason for not renewing the agreement. This solution has a precedent in oil industry legislation in Australia, as well as general franchise regulation in a number of states in the United States.
6. A good faith regime in relation to renewal would strike an appropriate balance between the freedom of landlords and franchisors to run their businesses, and the legitimate interests of tenants and franchisees to have their hard-earned goodwill recognised and protected.
This goes, too far, in my opinion. The propensity of customers to return to a location, or goodwill, is a combination of the reputation of the brand and the reputation of the local operator.
Only the local operator goodwill needs to be protected. And this can be done, by not allowing the franchisor to enforce its restrictive covenants should it not renew or passively terminate a franchise.
Some have argued that the California Franchise Relations Act has negative externalities.
Larry E. Ripsten has argued that;
Panel data on fast food establishments extracted from uniform franchise offering circulars show that laws restricting franchisor termination rights lead to a reduction in franchising, and this reduction is not offset by the concomitant increase in franchisor-operated establishments.
However, there are two problems with this conclusion. First, none of franchise agreements were looked at any in detail to determine whether in fact their termination clauses provided stronger protection than what the individual state required or allowed.
Second, the data comes from what happened when Iowa introduced its franchise relationship law. The IFA and its member franchisors engaged in a massive campaign which included removing franchise locations to repeal the Iowa law because of the IFA's stated opposition to anything more than pre-disclosure franchise law. This large issue, I believe, contaminates the data: franchisors were leaving Iowa in protect over the entire law - and the protest effectively worked as Iowa repealed its law.
In conclusion, the California Franchise Relations Act neatly balances the franchisor's genuine business interest in control against a possible overreach by requiring the franchisor to give up a restrictive covenant when the franchisor has said that it has no valid business purpose in enforcing it, by failing to renew the franchise location. (This is a nice thread at BMM about the renewal issue in Australia for those of you who want to follow this issue.)
