Are Franchisees Well-Informed? Revisiting the Debate over Franchise Relationship Laws

Article excerpt

Abstract

The most vital debate in the field of franchise contract law over the last few decades has focused on the following issue: Whether the law should protect franchisees against franchisor opportunism. Franchisor advocates suggest that franchisee protection laws, commonly known as "franchise relationship laws," are undesirable. Their opposition to such laws is based primarily on an assumption that franchisees consider all relevant information before signing a franchise contract and make a well-informed choice among the range of franchise alternatives available. In particular, prior to signing the contract, franchisees are assumed to have read the franchise disclosure documents made available to them, compare the various contracts and disclosure documents offered by different franchisors, and consult with a specialized franchise attorney regarding the terms of the franchise contract. Since franchisees consider all of the relevant information and make a well-informed decision, they do not deserve, according to franchisor advocates, any special legislative protection that would interfere with the franchisor-franchisee free-market relationship.

Based on a significant body of existing empirical research, which has thus far been overlooked in the debate over franchise relationship laws, this article will argue that the assumption that franchisees consider all relevant information before signing a franchise contract and make a well-informed choice is questionable. Briefly summarized, the argument presented in this article is as follows: New franchisees that join a franchise network normally lack prior business ownership experience. This lack of experience presents significant cognitive obstacles for novice franchisees when attempting to consider all of the relevant information before acquiring ownership of a franchise unit. Such cognitive obstacles-contrary to the franchisor advocates' view--often lead franchisees to ignore franchise disclosure documents, avoid conducting a comparison between various franchise contracts and disclosure documents, and neglect to consult with a specialized franchise attorney prior to signing the franchise contract. Given this reality, theoreticians and legislators interested in creating franchise laws that protect novice franchisees from possible opportunism by franchisors must cast doubt on the assumption that franchisees are well-informed business people and incorporate into their analyses a more representative conception of franchisee characteristics.

I. INTRODUCTION

II. FRANCHISE RELATIONSHIP LAWS--OVERVIEW

III. THE FRANCHISOR ADVOCATES' VIEW

IV. THE CRITIQUE

   A. New Franchisees Lack Prior Business Ownership
   Experience

      1. Explanation

      2. Empirical Evidence

   B. Inexperienced Franchisees Ignore Relevant
Information

      1. Explanation

      2. Empirical Evidence

V. CONCLUSION

I. INTRODUCTION

The most vital debate in the field of franchise contract law over the last few decades has focused on the issue of whether the law should protect franchisees against franchisor opportunism. (1) Franchisor advocates claim that franchisee protection laws, commonly known as "franchise relationship laws," are undesirable. (2) Their opposition to such laws is based mainly on an assumption that franchisees consider all relevant information before signing a franchise contract and make a well-informed choice among the range of franchise alternatives available. (3) In particular, according to this analysis, prior to signing the franchise contract, franchisees read the franchise disclosure documents made available to them before signing the franchise contract, compare the various contracts and disclosure documents offered by different franchisors, and consult with a specialized franchise attorney regarding the terms of the franchise contract. (4) According to franchisor advocates, since franchisees consider all of the relevant information and make well-informed decisions, they do not require any special legislative protection that would interfere with the franchisor-franchisee free market relationship. …