Are Franchisees Well-Informed? Revisiting the Debate over Franchise Relationship Laws
Emerson, Robert W., Benoliel, Uri, Albany Law Review
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
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. (5) Franchisor advocates' opposition to franchise relationship laws has been significantly influential in the development of franchise law in general, as is evident in state and federal policy making. (6) To date, most states have refused to adopt general franchise relationship laws. (7) At the federal level, such laws have been rejected entirely. (8)
Empirical evidence, however, casts significant doubt on the theoretical assumption that, before signing a franchise contract, franchisees consider all relevant information which leads to a well-informed choice. (9) Briefly summarized, the argument presented in this article is as follows: New franchisees that join a franchise network normally lack prior business ownership experience. (10) 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. (11) Specifically, inexperienced franchisees often do not know in which subjects they are ignorant or what information they should consider before acquiring ownership of a franchise unit (the "unawareness problem"). (12) In addition, unseasoned franchisees must invest significant cognitive efforts in distinguishing between relevant and irrelevant business and legal information on franchise ownership ("screening difficulty"). (13) Finally, novice franchisees have great difficulty in fully understanding the business and legal data to which they are exposed in the pre-contractual process, or how to place it in context, evaluate it, and act accordingly ("comprehension limitations"). (14) Such cognitive obstacles often lead franchisees-contrary to the franchisor advocates' view--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. (15)
This article proceeds as follows: Part II will provide legal context by briefly reviewing the statutory framework underlying the debate over the desirability of franchise relationship laws. Part III will provide theoretical context through outlining the assumption on which franchisor advocates base their opposition to franchise relationship laws--namely, that franchisees consider all relevant information before signing a franchise contract and make a well-informed decision. Part IV will present our critique of the franchisor advocates' assumption.
II. FRANCHISE RELATIONSHIP LAWS--OVERVIEW
Franchise relationship laws are statutes that mainly govern the ongoing relationship between franchisors and franchisees. (16) These laws have two central alleged purposes: first, to correct a perceived inequality in bargaining power between franchisors and franchisees; (17) and second, to protect franchisees against perceived abusive behavior by franchisors, (18) The major franchisor abuses (19) at which franchise relationship laws are aimed include: unjust termination of the franchise contract without adequate notice or reasonable cause, (20) restrictions on free association among franchisees, (21) requirements of arbitration outside the franchisee's state, (22) and encroachment on the franchisee's territory--namely, establishment of a new franchise unit in unreasonable proximity to an existing franchisee. (23) Notably, such abuses often are prohibited by mandatory franchise relationship laws, regardless of the express franchise contract provisions. (24)
To date, only a minority of states have enacted general franchise relationship laws that are not restricted to particular industries. (25)
In addition, several states have industry-specific franchise relationship laws. (26) These industry-specific statutes relate to automobile dealerships, (27) alcoholic beverages, (28) farm equipment, (29) petroleum, (30) and office products, (31) among other industries (32)
At the federal level, several general franchise relationship bills have been introduced, but all were rejected. (33) For example, a federal franchise relationship law of general application was proposed in 1971; however, no such law has ever been adopted. (34) In 1992, former Democratic Congressman James H. Scheuer introduced a franchise relationship bill which ultimately was not adopted. (35) Similarly, former Democratic Congressman John J. LaFalce in 1993 and 1995, and Republican Congressman Howard Coble in 1998 and 1999, each proposed franchise relationship bills that did not pass. (36) In addition, in 2007, the Federal Trade Commission (FTC) considered but eventually rejected federal regulation of the franchise relationship. (37) To date, there is no franchise relationship law of general application in existence. (38)
While broad legislative efforts have failed at the federal level, franchisees in certain industries have been successful in obtaining two central federal industry-specific relationship laws. (39) The first federal law specifically regulating franchise relationships was the Automobile Dealers' Franchise Act, commonly known as the Dealers' Day in Court Act (ADDCA). (40) Broadly speaking, the ADDCA provides that the franchisor must act in "good faith," not only in performing the franchise contract, but also in terminating the contract. (41) In 1978, Congress adopted another federal law, the Petroleum Marketing Practices Act (the PMPA), which sets forth procedures that a gas station franchisor must follow before it may terminate or refuse to renew a franchisee. (42)
III. THE FRANCHISOR ADVOCATES' VIEW
Franchisor advocates suggest that franchisees do not need any special legal protection against franchisor abuses under franchise relationship laws or other legal regimes. (43) To begin with, franchisor advocates assume that franchisees are sophisticated business people. (44) As Larry Ribstein explains, in franchise contracts "the price is set in each case by negotiations among sophisticated and knowledgeable parties." (45) Similarly, Christopher Drahozal argues that "franchisees are much closer to the sophisticated, well-informed individual ... than are consumers or employees, and should be treated accordingly." (46)
Franchisor advocates further believe that since franchisees are sophisticated business people, they consider all relevant information in order to make a well-informed choice before signing a franchise contract. As William Killion, a long-time franchisor attorney and past Editor-in-Chief of the Franchise Law Journal explains, franchisees today have a wealth of information available to them before they sign the franchise agreement: "[They] have all of the information that legislators and regulators have found they need to make an informed decision." (47)
Additionally, franchisor advocates argue that since franchisees consider all of the relevant information, they specifically read the Franchise Disclosure Document (FDD), which must be provided to franchisees by the franchisor before signing the franchise agreement, according to the regulations of the Federal Trade Commission. (48) The FDD includes information which arguably warns franchisees against potential abuses by the franchisor. In particular, the FDD includes data on pending and prior lawsuits involving the franchisor. (49) Furthermore, the FDD must include, in a specified tabular format, the provisions of the franchisee agreement dealing with termination and arbitration. (50) In addition, when the franchisor does not offer an exclusive territory to the franchisor, the FDD must include a prescribed statement underscoring that fact and a warning about the consequences of purchasing a non-exclusive territory. (51) Since the FDD includes data that may warn franchisees against franchisors potential abuses, the FDD--according to franchisor advocates--guarantees the franchisee access to the basic information necessary to reach an informed decision before entering a franchise contract. (52) As Donald Horwitz and Walter Volpi, who represented the McDonald's Corporation, explain, "full disclosure enables prospective franchisees to make a reasoned evaluation of the potential risks and benefits of franchising." (53) In a similar vein, George Hay argues that franchise disclosure documents operate "to ensure that prospective investors are given information about the likely costs and revenues of a particular franchise opportunity in order to help them make an informed choice." (54)
As sophisticated business people who consider all of the relevant information, franchisees are presumed--by franchisor advocates-to be able not only to read the FDD, but also to compare systematically the various franchise contracts and disclosure documents offered by different franchisors. As Thomas Pitegoff, Chair of the Franchise Committee of the New York State Bar Association's Business Law Section, argues, "[p]rospective franchisees now have hundreds of franchises from which to choose. If the terms of one franchise are too onerous ... the prospective franchisee may go elsewhere...." (55) The American Bar Association Section of Antitrust Law, too, explains, that "[a]rmed with ... [disclosure documents] franchisees can make informed choices among the range of franchise alternatives then available to them." (56) Beyond their ability to compare the various franchise contracts and disclosure documents, according to franchisor advocates, franchisees, as sophisticated business people, are able to consult with a specialized franchise attorney regarding the terms of the franchise contract before signing it. As Larry Ribstein states, franchisees "have the ability and incentive to read the contract carefully or hire an attorney to do so." (57)
Ultimately, franchisor advocates conclude that since franchisees read disclosure documents, compare various franchise contracts and disclosure documents, and are able to consult with a specialized lawyer, they do not deserve any special legal protection under franchise relationship laws or a similar legal regime. (58) Such protection, in fact, would interfere with the franchisor-franchisee free-market relationship. As Paul Rubin explains, "[w]hat is involved here is a general freedom-of-contract issue...." (59)
IV. THE CRITIQUE
The franchisor advocate's assumption that franchisees consider all relevant information in order to make a well-informed choice before signing a franchise contract is questionable. New franchisees that join a franchise network normally lack prior business ownership experience. (60) 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. (61)
A. New Franchisees Lack Prior Business Ownership Experience
New franchisees joining franchise networks typically do not possess prior business ownership experience, let alone franchise unit ownership experience. (62) The central reason for this phenomenon is the nature of the franchise business format, which attracts individuals of limited business ownership experience. As will be explained in greater detail below, individuals with no prior business ownership experience are attracted to the franchise business format because it provides the franchisee with the following: (1) an opportunity to join an already established business system; (2) site selection assistance; (3) initial training; (4) ongoing training; and (5) detailed operational manuals. (63)
First, as mentioned, the franchise business format provides novice franchisees with an opportunity to join an already established business system. (64) Because a franchising system provides a business formula developed through previous high-risk yet successful experiences, many of the unavoidable business mistakes that plague the independent business owner have already been overcome in the franchise system. (65) Thus, by becoming a part of an established system, the inexperienced franchisee reduces his overall risk of failure. (66) "This risk diminishment allows [a novice] franchisee to enter a field which he or she has no previous [experience with an apparently increased chance of business success]." (67)
Under the franchise business format, the inexperienced franchisee often also receives site selection assistance. Franchisors frequently "prepare a list of factors to be investigated prior to [selecting the site for the new franchised unit]." (68) These factors may include "economic strength and potential of a particular region ... availability of transportation for supplies ... demographic characteristics within the community ... traffic ingress and egress at sites [under consideration]; land development and construction costs, and location of primary [business] competitors...." (69) The franchisors will assist the inexperienced franchisee to select an appropriate site, using their established criteria for site selection. (70)
The franchise business format provides to novice franchisees not only assistance in site selection, but also an initial training program. (71) Normally, an inexperienced franchisee will receive initial training on all functions of operating the business, including finance, marketing, business operations, and management of personnel. (72) More specifically, the newcomer franchisee will be trained on how to develop and read a balance sheet and an income statement, how to use a cash register, how to recruit, select and train employees, and how to control inventory. (73) Indeed, empirical evidence shows that initial training represents a vital motivating factor for franchisees in the decision to purchase a franchised outlet. To illustrate, Scott Weaven and Lorelle Frazer adopted a qualitative methodology to examine the motivational incentives driving the choice to enter the franchising business from the franchisee's perspective. (74) "The sample was made up of current franchisees within the McDonald's franchise system." (75) According to the study, "most single unit franchisees [claimed] that ... initial training was a [primary] motivation in the decision to [purchase a franchise unit]." (76) "Franchising was perceived [by franchisees] as an easier method of entering self-employment in areas in which [they] had limited prior [business] experience." (77)
In addition, the franchise business format often provides inexperienced franchisees with ongoing training during the franchise relationship. Such training may cover "marketing updates, industry trends, new product[s] and service[s] developments...." (78) "Field representatives play an important role in the delivery of [ongoing] training. They often work directly with [novice] franchisee[s] at the business site, providing expert [consultation], [offering] on-the-spot management and operational suggestions [to franchisees], ... [and supplying] video or audio materials" for inexperienced franchisees." (79)
Frequently, inexperienced franchisees also receive detailed operational manuals. These manuals "describe each major function and operating procedure of the business." (80) They often include detailed instructions on topics such as quality standards, warranties and replacement practices, customer relations and service, inventory loss prevention, and maintenance control. (81)
It is worth noting that new franchisees regularly lack prior business experience not only because of the nature of the franchise business format, but also due to the fact that franchisors tend to prefer to contract with franchisees with no prior business experience. (82) Inexperienced franchisees, as opposed to those with experience, are relatively easy to control. (83) They are more likely to adapt themselves to the standard system procedures and methods of the franchise system, (84) while they are less likely to use the franchisor's know-how, trade secrets, and confidential information in competition with it. (85) They are also less likely to be a difficult opponent in the event of any dispute with the franchisor. (86)
2. Empirical Evidence
Empirical evidence shows that new franchisees that join a franchise network are unlikely to possess franchise unit ownership experience, or even any prior business ownership. The results of Kimberly Morrison's research examining, among other things, the personal characteristics of franchisees, illustrate this phenomenon. (87) Using a mailed questionnaire, data were obtained from 307 U.S. franchisees from four industries: "restaurant, business aids [sic] and services, automotive products and services, [and] non-food retailing." (88) The sample was randomly compiled by a research firm and was composed of franchisees from forty-six states, (89) According to the study, "only 20 percent of the sample had actually been business owners before becoming franchisees." (90)
Another empirical study conducted by Alden Peterson and Rajiv Dant shows even more strongly that most new franchisees lack prior business ownership experience. (91) Using a mailed questionnaire, data were obtained from seventy-four random U.S. franchisees of a major nationwide franchise system in the service industry. (92) According to the study, only 6.7% of the sample had owned an independent business prior to joining the franchise system. (93)
Interestingly, empirical studies show that franchisees often lack not only prior business ownership experience, but also experience in the same business as their franchise. For example, Robert L. Anderson, Clarence Condon, and John Dunkelberg conducted an empirical study among U.S. franchisees. (94) Using a mailed questionnaire, data were obtained from sixty-one franchisees. (95) According to the results of the study, "only 38 percent [of the franchisees] had worked in the same business as their franchise." (96) Patrick Kaufmann's study produced a similar outcome, where among sixty-three U.S. franchisees who completed his questionnaires, approximately "70% had purchased franchises in business sectors in which they had no specific work experience." (97)
What is more, there is empirical evidence that lack of prior business experience is not unique to U.S. franchisees and is in fact a global phenomenon, prototypical to the nature of the franchise business format. For instance, Russell Knight conducted an empirical study among Canadian franchisees in order to examine, among other things, their personal characteristics. (98) Using a mailed questionnaire, data were obtained from 105 franchisees in a variety of well-known franchises across Canada. (99) According to the results of the study, 72% of franchisees had no previous business management experience before joining the franchise system. (100) In another Russell Knight study, conducted with a similar sample, 89% of Canadian franchisees had no previous experience in franchising before joining the franchise system. (101)
Lack of prior business experience among franchisees was also documented in Australia. To illustrate, Nerilee Hing conducted an empirical study that included an examination of franchisees' personal traits. (102) Data were obtained from nine restaurant franchise companies and 127 of their franchisees. (103) The study's findings determined that most franchisees had no prior entrepreneurial business experience. (104) Similarly, Scott Weaven and Carmel Herington adopted a qualitative methodology for examining the personal characteristics of Australian female franchisees, among other factors. (105) According to the study, most female franchisees had limited business experience. (106)
Indeed in England, studies also found a general lack of prior business experience among franchisees. For example, John Stanworth conducted an empirical study examining various aspects of U.K. franchising including the franchisees' personal characteristics. (107) Data were obtained from 249 franchisees using a mailed questionnaire, followed by in-depth interviews. (108) The franchisees were chosen from a variety of business sectors, including fast food, dry cleaning and hygiene services, and printing services. (109) The study yielded the result that two-thirds of franchisees had no self-employment experience prior to joining the franchise system. (110)
Additionally, lack of prior business experience among franchisees was documented in Spain. Jose Ramirez-Hurtado and Bernardino Quattrociocchi conducted an empirical study among Spanish franchisees, which obtained data using a mailed questionnaire from 220 Spanish franchisees. (111) Similar to the studies conducted in other countries, 60.7% of the franchisees surveyed had no previous business ownership experience. (112)
B. Inexperienced Franchisees Ignore Relevant Information
Inexperienced franchisees tend to sign franchise contracts on the basis of inadequate pre-investment investigation and evaluation. (113) More specifically, franchisees--in contrast with the franchisor advocates' view--ignore franchise disclosure documents, avoid conducting a comparison between various franchise contracts and disclosure documents, and refrain from consulting with a specialized franchise attorney before signing the franchise agreement. (114) Below we will first provide a theoretical explanation for this phenomenon. (115) Second, we will present empirical evidence supporting the existence of the phenomenon. (116)
A prospective franchisee who aspires to own a franchise unit usually needs to search for complex information about potential franchise opportunities. This information is business ownership oriented; namely, it deals with many financial and legal aspects that typify the ownership of a business. To begin with, it is necessary that a prospective franchisee estimate the sales revenue, costs, cash flow, net income, and loss of various franchise ownership options. (117) In addition, the franchisee must investigate the legal risks involved in the relationship between the franchisee's unit and its employees, suppliers, franchisor, and customers. (118) As will be explained in more detail below, since the vast majority of prospective franchisees lack prior business ownership experience, they will face significant cognitive obstacles when attempting to consider all of the relevant information before acquiring ownership of a franchise unit. (119) More specifically, the novice franchisee will face three cognitive obstacles: the unawareness problem, screening difficulty, and comprehension limitations. (120)
Novice franchisees, who have recently decided that they want to own a franchise, normally suffer from an unawareness problem. They are typically unaware of all the business and legal risks involved in owning a franchise unit. (121) Furthermore, inexperienced franchisees may be unaware of where to look for the most accurate and qualified information on franchise ownership. (122) As a result of franchisees' unawareness, they will be forced to invest major cognitive efforts in order to ascertain which risks are unknown to them and where to seek accurate information regarding those risks. (123) Such a task is extremely challenging, given that conducting a high-quality investigation into the matter demands that one knows enough to know what is not known. (124)
Not only do inexperienced franchisees face an unawareness problem but they must also cope with a screening difficulty. In particular, they must expend great cognitive efforts in order to differentiate between relevant and irrelevant business and legal information on franchise ownership, in which they most likely have never engaged. (125) Such a screening task presents a real challenge since novice franchisees who wish to make an optimal franchise investment decision must examine an overwhelming amount of complex information before signing a franchise contract. Specifically, at a preliminary stage the franchisee generally must invest time in the following steps (126): reading complex franchise directories, (127) reading articles in franchise business publications, (128) attending business trade shows and expositions, (129) and conducting related research on the internet. (130) Following this preliminary stage, the franchisee will have to contact selected franchisors in order to acquire detailed business and legal information regarding each individual franchise opportunity. (131) He or she will then receive a massive amount of material requiring business and legal analysis. (132) This material will include lengthy promotional items, operational items, and complex legal items including the FDD. (133) Upon receipt of detailed material on selected franchise opportunities, the franchisee may be required to take the following additional steps (134): interview potential franchisors, (135) interview existing franchisees, (136) examine lengthy and complex franchise agreements, review audited financial statements, and conduct trade-area surveys. (137)
In addition to the screening difficulty, franchisees face comprehension obstacles at the pre-contractual stage. Again, most inexperienced franchisees lack an adequate base of knowledge on what it takes to own any business, let alone a franchise unit. (138) Specific to this context, they generally lack adequate knowledge of franchise ownership terminology, the attributes of a franchise owned unit, criteria for evaluating a franchise system, and criteria for comparing different franchise systems. (139) Given this lack of knowledge, inexperienced franchisees find it difficult to comprehend and evaluate the complex legal and business data available to them at the pre-contractual stage. (140) Indeed, prospective franchisees often report that when they read legal FDDs, they are seized by a condition dubbed "MEGO--'My Eyes Glaze Over.'" (141)
Given the significant unawareness, screening and comprehension obstacles that novice franchisees face at the pre-contractual stage, they frequently discount important information already at that stage. (142) The dismissal of information occurs in order to simplify cognitively the complex pre-contractual investigation. (143) In the process of simplification, novice franchisees eliminate data from consideration on the basis of expediency rather than importance. (144) The incompetence of novice franchisees ultimately causes them to base their decisions on relatively '"shallow' aspects" that might be relatively quick and "easy to judge," such as franchise advertisements, newspaper articles, and franchise prices. (145) In contrast with the franchisor advocates' view, the significant cognitive obstacles faced by novice franchisees actually lead them to ignore franchise disclosure documents, avoid conducting a thorough comparison of various franchise contracts and disclosure documents, and refrain from consulting with a specialized franchise attorney before signing the franchise agreement. (146)
2. Empirical Evidence
There is ample empirical evidence supporting the conclusion that the significant cognitive obstacles that novice U.S. franchisees face at the pre-contractual stage lead them to ignore important data, as emphasized above. (147) For example, Kimberly Morrison's study, based on data collected by a mailed questionnaire from 307 U.S. franchisees in various industries, revealed that most franchisees ignored the franchise disclosure documents before investing in the franchise. (148) In addition, her study demonstrated that most franchisees did not consult with a lawyer before the signing of the franchise contract. (149) Likewise, as discussed previously, Anderson, Condon and Dunkelberg obtained data from sixty-one franchisees using mailed questionnaires. (150) According to their data, franchisees examined only an average of about three different franchise chains before selecting the franchise they own. (151) This fact stands in sharp contrast with franchisors advocates' assumption that franchisees possess the cognitive ability to compare numerous--it is safe to assume hundreds--of franchise contracts available at the market, before signing the franchise agreement. (152)
Furthermore, empirical studies show that the lack of adequate pre-investment investigation conducted by inexperienced franchisees is not unique to U.S. franchisees. (153) Franchisees' inadequate inquiry is a global phenomenon, which is derived from the fact that franchisees are, by their very nature, inexperienced. (154) To illustrate, Lorelle Frazer, Bill Merrilees, and Owen Wright, adopting a qualitative methodology, conducted in-depth interviews with eighteen Australian franchisors, current franchisees, and exfranchisees. (155) One general conclusion that emerged from those interviews was that potential Australian franchisees who lack business experience tend to enter franchising on the basis of little or no research or investigation. (156) Likewise, Weaven, Frazer, and Giddings conducted in-depth interviews with twenty-four Australian franchising experts, such as franchisors, franchising consultants, franchising academics, franchise brokers, and mediators. (157) Most of the interviewees agreed that franchisees who had no prior business experience tended to seek relatively little advice from lawyers and other advisors prior to entering franchise agreements, (158) In a related study, John Stanworth, using mailed questionnaires and interviews, obtained data from 380 U.K. franchisees in a variety of industries. (159) According to his study, most of those franchisees who had consulted with advisors before signing the franchise contract were convinced that their advisors were not knowledgeable about franchising, (160) indicating that those franchisees who consulted with a legal advisor did not consult with a specialized one. Likewise, Mark Hatcliffe, Val Mills, David Purdy, and John Stanworth obtained data from 169 U.K. franchisees through mailed questionnaires and interviews. (161) According to their study, most franchisees seriously considered only one or two franchise chains before selecting the franchise they owned. (162)
Notably, these empirical studies--showing that novice franchisees around the world do not conduct adequate research and investigation prior to signing the franchise contract--confirm the anecdotal statements of various franchise specialists. Two such specialists, Andrew Selden and Rupert Barkoff, both of whom served as Chairs of the American Bar Association Forum on Franchising, state that "[m]any franchisees never consult a lawyer in the process of buying a franchise." (163) Similarly, Elizabeth Spencer, a scholar, specialized in franchising, states that "Ira]any franchisees are unaware of the need for advice or are unable to secure the quality of advice they need." (164) Likewise, Keith Kanouse, a U.S. franchise attorney boasting twenty-two years of experience in franchise matters, claims that most prospective franchisees simply do not read franchise disclosure documents. (165)
As a key initial step in evaluating franchise regulation schemes, we must understand that the opposition to franchise relationship laws is based largely on the assumption that franchisees are sophisticated business people who (1) consider all relevant information, and (2) make a well-informed choice among the range of franchise alternatives available to them prior to signing a franchise contract. (166) However, empirical evidence raises much doubt regarding this assumption. In actuality, new franchisees are likely to be lacking prior business experience. (167) This lack of experience presents significant cognitive obstacles for novice franchisees at the pre-contractual stage. Inexperienced franchisees must invest significant cognitive efforts in identifying the risks about which they are ignorant and then finding accurate information on them. (168) Novice franchisees must also expend significant cognitive efforts in order to differentiate between relevant and irrelevant information. (169) Moreover, it is extremely difficult for unseasoned franchisees to comprehend the entirety of the data to which they are exposed in the pre-contractual process. (170) Given these cognitive obstacles, franchisees often discount important information at the pre-contractual stage. Franchisees ignore disclosure documents, do not compare various franchise opportunities, and refrain from consulting with a specialized franchise attorney. (171) 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 sophisticated, well-informed business people and incorporate into their analyses a more representative conception of franchisee behavior. The assumption that franchisees consider all relevant information before signing a franchise contract has little theoretical or empirical support in actual practice, and thus the door is open to reconsidering the adoption of franchise relationship laws.
Robert W. Emerson * & Uri Benoliel **
* Huber Hurst Professor of Business Law & Legal Studies, Warrington College of Business Administration, University of Florida. B.A., University of the South (Sewanee), 1978; J.D., Harvard Law School, 1982.
** Assistant Professor, Academic Center of Law & Business. J.S.D., University of California, Berkeley, 2006; LL.M, Columbia University, 2005; LL.B., Hebrew University of Jerusalem, 2003.
We are grateful to Theodore Banks, Rupert Barkoff, Omri Ben-Shahar, Christopher Drahozal, Victor Fleicher, Tamar Frankel, Patrick Kaufmann, Robert Prentice, Arie Reichel, Spencer Waller, James White, Oliver Williamson, and Eyal Zamir for their invaluable comments and critique. The paper has been accepted for presentation at the 2012 Midwest Law and Economics Association (MLEA) Meeting, 2012 International Society for New Institutional Economics (ISNIE) Conference, 2012 European Association of Law and Economics (EALE) Conference, and 2012 Canadian Law and Economics Association (CLEA) Conference.
(1) See infra Part II.
(2) See infra Part III.
(3) See infra Part III.
(4) See infra Part III.
(5) See infra Part III.
(6) See infra Part II.
(7) See infra Part II.
(8) See infra Part II.
(9) See infra Part IV.B.2.
(10) See infra Part IV.A.
(11) See infra Part IV.B.1.
(12) See infra Part IV.B.1.
(13) See infra Part IV.B.1.
(14) See infra Part IV.B.1.
(15) See infra Part IV.B.2.
(16) See David Hess, The Iowa Franchise Act: Towards Protecting Reasonable Expectations of Franchisees and Franchisors, 80 IOWA L. REV. 333, 346-47 (1995). See generally Thomas M. Pitegoff & W. Michael Garner, Franchise Relationship Laws, in FUNDAMENTALS OF FRANCHISING 183, 184 (Rupert M. Barkoff & Andrew C. Selden, eds., 3d ed. 2008) (offering a general overview of the "franchise relationship" laws that govern following the signing of a franchise agreement).
(17) See NEB. REV. SWAT. [section] 87-401 (2012); N.J. SWAT. ANN. [section] 56:10-2 (West 2012); R.I. GEN. LAWS [section] 19-28.1-2 (2012); VA. CODE ANN. 13.1-558 (2012); WIS. SWAT. [section] 135.025(2)(b) (2012); Christopher J. Curran, Claims Against a Franchisor Upon an Unreasonable Withholding of Consent to Franchise Transfer, 23 J. CORP. L. 135, 152 (1997); Peter C. Lagarias & Robert S. Boulter, The Modern Reality of the Controlling Franchisor: The Case for More, Not Less, Franchisee Protections, 29 FRANCHISE L.J. 139, 141 (2010); Dennis D. Palmer, Franchises: Statutory and Common Law Causes of Action in Missouri Revisited, 62 UMKC L. REV. 471, 491 (1994); Thomas M. Pitegoff, Franchise Relationship Laws: A Minefield for Franchisors, 45 BUS. LAW. 289, 289 (1989).
(18) See WIS. SWAT. [section] 135.025(2)(b); Geib v. Amoco Oil Co., 29 F.3d 1050, 1056 (6th Cir. 1994); Bitronics Sales Co. v. Microsemiconductor Corp., 610 F. Supp. 550, 556 (D. Minn. 1985); Hartford Elec. Supply Co. v. Allen-Bradley Co., No. CV 96562061S, 1997 WL 297256, at *3, (Conn. Super. Ct. May 28, 1997) aff'd, 736 A.2d 824 (Conn. 1999); Holiday Inns Franchising, Inc. v. Branstad, 537 N.W.2d 724, 728-29 (Iowa 1995): Kubis & Perszyk Assocs., Inc. v. Sun Microsystems, Inc., 680 A.2d 618, 626 (N.J. 1996); McDonald's Corp. v. Markim Inc., 306 N.W.2d 158, 162 (Neb. 1981); David L. Cahn & Jeffrey S. Fabian, Mobility, the Home, and the Scope and Application of State Franchise Relationship and Termination Laws, 30 FRANCHISE L.J. 107, 107 (2010); Curran, supra note 17, at 152: Palmer, supra note 17, at 491; Pitegoff, supra note 17, at 289.
(19) Lagarias & Boulter, supra note 17, at 143-44; Pitegoff & Garner, supra note 16, at 187-88; Pitegoff, supra note 17, app. E at 329-31.
(20) See ARK. CODE ANN. [section] 4-72-209 (2012); CAL. BUS. & PROF. CODE [section] [section] 20020-21 (West 2012); HAW. REV. SWAT. [section] 482E-6(H) (2012); 815 ILL. COMP. SWAT. 705/19 (2012); IOWA CODE [section] [section] 523H.7(1), 537A.10(7)(c) (2012); MINN. SWAT. [section] 80C.14(3)(b) (2012); MISS. CODE ANN. [section] 7524-57 (2012); MO. REV. SWAT. [section] 407.405(1) (2012); NEB. REV. SWAT. [section] 87-404; N.J. SWAT. ANN. [section] 56:10-5; N.D. CENT. CODE [section] 51-20.1-03 (2012); P.R. LAWS ANN. tit. 10, [section] 278a (2008); R.I. GEN. LAWS [section] 6-50-4; WASH. REV. CODE [section] 19.100.180(2)(j) (2012); WIS. SWAT. [section] 135.03.
(21) See ARK. CODE ANN. [section] 4-72-206(2); CAL. CORP. CODE [section] [section] 31220, 31302.5 (West 2012); HAW. REV. SWAT. [section] 482E-6(2)(A); 815 ILL. COMP. SWAT. 705/17; IOWA CODE [section] 523H.9; MICH. COMP. LAWS [section] 445.1574(g) (2012); MINN. R. 2860.4400(A) (2012); NEB. REV. SWAT. [section] 87-406(2); N.J. SWAT. ANN. [section] 56:10-7(b); R.I. GEN. LAWS [section] 19-28.1-16.
(22) See CAL. BUS. & PROF. CODE [section] 20040 (West 2012); MICH. COMP. LAWS [section] 445.1527; MINN. SWAT. [section] 80C.21; R.I. GEN. LAWS [section] 19-28.1-14.
(23) See HAW. REV. SWAT. [section] 482E-6(2)(E); IND. CODE [section] 23-2-2.7-1(2) (2012); IOWA CODE [section] 523H.6(1); MINN. R. 2860.4400(c); WASH. REV. CODE [section] 19.100.180(2)(t).
(24) See, e.g., IND. CODE ANN. [section] 23-2-2.7-1; PHILIP F. ZEIDMAN, LEGAL ASPECTS OF SELLING AND BUYING, [section] 7.6 (3d ed. 2011); Robert W. Emerson, Franchise Encroachment, 47 AM. BUS. L.J. 191,257 (2010); Palmer, supra note 17, at 491; Pitegoff, supra note 17, at 307.
(25) See, e.g., ARK. CODE ANN. [section] [section] 4-72-201 to -10; CAL. BUS. & PROF. CODE [section] 20000 (West 2012); CONN. GEN. SWAT. [section] 42-133e (2012); DEL. CODE ANN. tit. 6, [section] 2551 (2012); HAW. REV. SWAT. [section] [section] 482E-1-12; 815 ILL. COMP. SWAT. 705/1-44; IND. CODE [section] [section] 23-2-2.5-1 to -51; IOWA CODE [section][section] 523H.1-523H.17; MICH. COMP. LAWS [section] [section] 445.1501-46; MINN. SWAT. [section] [section] 80C.01-30; NEB. REV. SWAT. [section][section] 87-401-10; N.J. SWAT. ANN. [section] 56:10-1-15; S.D. CODIFIED LAWS [section] [section] 37 5A1-87 (2006); TENN. CODE ANN. [section][section] 47-25-1501-11 (2012); VA. CODE ANN. [section] [section] 13.1-557-74 (2012); WASH. REV. CODE [section] [section] 19.100.010-940; WIS. SWAT. [section] 135.01-07. The District of Columbia, Puerto Rico, and the Virgin Islands also have franchise relationship laws. See D.C. CODE [section] 34-1731.06 (2012): P.R. LAWS ANN. tit. 10, [section] [section] 278-278d; V.I. CODE ANN. tit. 12A, [section] 132 (2012).
(26) See Ernest A. Braun, Policy Issues of Franchising, 14 Sw. U. L. REV. 155, 216 (1984); Robert W. Emerson, Franchising and the Collective Rights of Franchisees, 43 VAND. L. REV. 1503, 1512 n.29 (1990).
(27) See, e.g., CAL. VEH. CODE [section] [section] 3060-69 (West 2012); IOWA CODE [section] [section] 322A.1-322A.17; N.M. SWAT. ANN. [section] [section] 57-16-1 to -16 (2012): see also ZEIDMAN, supra note 24, app. N (providing a detailed list of state motor vehicle franchise laws).
(28) See, e.g., 815 ILL. COMP. SWAT. 720/1-720/9; KAN. STAW. ANN. [section] 41-410 (2012); MICH. COMP. LAWS [section] 436.30b (1993) (repealed 1998); N.C. GEN. STAT. [section] [section] 18B 1200-16 (2012).
(29) See, e.g., KAN. SWAT. ANN. [section] [section] 16-1201-16-1208 (2012) (farm equipment statute); see also ZEIDMAN, supra note 24, app. Q (providing a detailed list of state farm equipment franchise laws).
(30) See, e.g., N.Y. GEN. BUS LAW [section] [section] 199-a to -n (McKinney 2012) (sale of motor vehicle fuel franchises); see also ZEIDMAN, supra note 24, at Appendix O (providing a detailed list of state petroleum franchise laws).
(31) See, e.g., HAW. REV. SWAT. 481G-1 to -8 (2012) (exempting office product machine franchises from laws regulating business relationships in the industry).
(32) See Pitegoff & Garner, supra note 16, at 186; DON T. HIBNER, JR., AM. BAR ASS'N, ANTITRUST SECTION: MONOGRAPH NO. 17, FRANCHISE PROTECTION: LAWS AGAINST TERMINATION AND THE ESTABLISHMENT OF ADDITIONAL FRANCHISES 16-17 (1990).
(33) See Braun, supra note 26, at 203-04; Robert W. Emerson, Franchise Terminations: Legal Rights and Practical Effects When Franchisees Claim the Franchisor Discriminates, 35 AM. BUS. L.J. 559, 563 (1998). See generally Donald P. Horwitz & Walter M. Volpi, Regulating the Franchise Relationship, 54 ST. JOHN'S L. REV. 217, 218 (1980) ("[L]egislation regulating the franchise relationship.., has frequently been proposed in Congress.").
(34) Pitegoff & Garner, supra note 16, at 185.
(35) Federal Fair Franchising Practices Act of 1992, H.R. 5961, 102nd Cong. (1992).
(36) Small Business Franchise Act of 1999, H.R. 3308, 106th Cong. (1999); Small Business Franchise Act of 1998, H.R. 4841, 105th Cong. (1998); Federal Fair Franchise Practices Act, H.R. 1717, 104th Cong. (1995): Federal Fair Franchise Practices Act, H.R. 1316, 103rd Cong. (1993).
(37) Pitegoff & Garner, supra note 16, at 186.
(38) See Emerson, supra note 33, at 577; Palmer, supra note 17, at 491; Pitegoff, supra note 17, at 289; Pitegoff & Garner, supra note 16, at 185.
(39) Pitegoff & Garner, supra note 16, at 186.
(40) Automobile Dealers' Franchise Act (Automobile Dealers' Day in Court Act), 15 U.S.C. [section] [section] 1221 25 (2006); see, e.g., H.C. Blackwell Co. v. Kenworth Truck Co., 620 F.2d 104, 106 (5th Cir. 1980) (identifying the relevant statute as the "Automobile Dealers' Franchise Act"); Woodard v. Gen. Motors Co., 298 F.2d 121, 124-25, 124 n.1 (5th Cir. 1962).
(41) 15 U.S.C. [section] 1222 (2006).
(42) Petroleum Marketing Practices Act, 15 U.S.C. [section] [section] 2801-06, 2821-24, 2841 (2006).
(43) See Report of the American Bar Association Section of Antitrust Law on Proposed Small Business Franchise Act, A.B.A. SEC. ANTITRUST REP. cmt. 24, available at http://www.ftc.govPocp/rulemaking/franchise/comments/comment025.htm (last visited Jan. 15, 2013) [hereinafter ABA REPORT]; James A. Brickley et al., The Economic Effects of Franchise Termination Laws, 34 J.L. & ECON. 101, 130 (1991); Mary deLeo, Emasculating Goliath: Did Postal Instant Press v. Sealy Strike an Unfair Blow at the Franchising Industry?, 25 W. ST. U.L. REV. 117, 170-72 (1997); Christopher R. Drahozal, "Unfair" Arbitration Clauses, 2001 U. ILL. L. REV. 695, 765-67 (2001); Horwitz & Volpi, supra note 33, at 276-78; William L. Killion, The Modern Myth of the Vulnerable Franchisee: The Case for a More Balanced View of the Franchisor-Franchisee Relationship, 28 FRANCHISE L.J. 23, 31 (2008); Pitegoff, supra note 17, at 319-20; Larry E. Ribstein, Choosing Law by Contract, 18 J. CORP. L. 245, 299-300 (1993); Paul H. Rubin, The Theory of the Firm and the Structure of the Franchise Contract, 21 J.L. & ECON. 223, 231-32 (1978).
(44) Killion, supra note 43, at 30.
(45) Ribstein, supra note 43, at 257.
(46) Drahozal, supra note 43, at 766. See also Thomas J. Chinonis, Implied Covenant of Good Faith: A Two-Way Street in Franchising, 11 DEPAUL BUS. L.J. 229, 243 (1998) ("With the widespread familiarity and popularity of franchising, franchisees also know better what to look for and what to expect in a typical franchise relationship."); deLeo, supra note 43, at 171 ("Today's franchisees are more savvy, more educated, more likely to come from a business background and therefore more likely to be experienced in assessing risks and making informed decisions accordingly."); Christopher R. Drahozal & Quentin R. Wittrock, Is There a Flight from Arbitration?, 37 HOFSTRA L. REV. 71, 87 (2008) ("[F]ranchisees are business people, and at least some franchisees are very sophisticated business people--including publicly-traded companies."); Horwitz & Volpi, supra note 33, at 248 n.123 ("The modern franchisee is no longer a no-experience novice. The typical new franchisee, in many industries, is a professional franchisee--compared with the amateur franchisee of the 1950's, and the 1960's."); Pitegoff, supra note 17, at 315-16 n.111 ("Today's franchisee is frequently a trained and well-financed businessman, with a good understanding of the franchise relationship and his role in it.").
(47) Killion, supra note 43, at 31.
(48) 16 C.F.R. [section] 436 (2012).
(49) FED. TRADE COMM'N, THE FRANCHISE RULE COMPLIANCE GUIDE 34-41 (2008), available at http://business.ftc.gov/sites/default/files/pdf/bus70-franchise-rule-compliance-guide.pdf.
(50) Id. at 80-83.
(51) Id. at 72-73.
(52) See Killion, supra note 43, at 29.
(53) Horwitz & Volpi, supra note 33, at 217, 249.
(54) George A. Hay, Is the Glass Half-Empty or Half-Full?: Reflections on the Kodak Case, 62 ANTITRUST L.J. 177, 188 (1993); see also Brickley et al., supra note 43, at 111; see also Killion, supra note 43, at 28 ("[F]ranchisees now have through the typical franchise disclosure document detailed information about the franchise opportunity, the very information a number of states and the FTC have determined will allow the franchisee to make an informed buying decision."); Pitegoff, supra note 17, at 314; deLeo, supra note 43, at 171 ("Disclosure laws ensure potential franchisees are advised of the nature and scope of the franchise agreement prior to signing."); ABA REPORT, supra note 43, at 20. See generally Drahozal, supra note 43, at 766-67 (discussing franchisees' contract term shopping due to sophisticated business knowledge); Drahozal & Wittrock, supra note 46, at 87 (discussing the sophistication of franchisees as business people).
(55) Pitegoff, supra note 17, at 315 (emphasis added).
(56) ABA REPORT, supra note 43, at 20. See Drahozal, supra note 43, at 766-67; see Drahozal & Wittrock, supra note 46, at 87; Hay, supra note 54, at 188 ("But whatever one might argue about the sophistication, or lack thereof, of copy machine purchasers, the argument seems far less plausible when applied to prospective franchisees. There are literally thousands of franchise opportunities available to prospective investors.... ") (emphasis added); Horwitz & Volpi, supra note 33, at 246; Killion, supra note 43, at 30 ("FRANdata estimates that there are more than 2,900 active franchise systems today.... With such a broad variety of franchisors competing with each other for franchise opportunities, it is difficult to imagine that . . . franchisees have little alternative but to give in to the contractual dictates of an overpowering franchisor.") (emphasis added); see also Chinonis, supra note 46, at 243 ("Since prospective franchisees now have hundreds of franchises from which to choose, they can refuse to enter agreements that may not appear fair to franchisees.") (emphasis added).
(57) Ribstein, supra note 43, at 257. See also Drahozal, supra note 43, at 766-67; Horwitz & Volpi, supra note 33, at 248.
(58) See Killion, supra note 43, at 31; Pitegoff, supra note 17, at 319-20; deLeo, supra note 43, at 171-72. See generally ABA REPORT, supra note 43, [section] 1(C) (detailing why the Antitrust Section believed Small Business Franchise Act of 1998 should not be adopted). But see Robert W. Emerson, Franchise Contract Clauses and the Franchisor's Duty of Care Toward Its Franchisees, 72 N.C.L. REV. 905 (1994) (arguing that the franchise relationship affords franchisors so much discretionary power that for many franchise contract clauses the franchisor should be held to a higher standard of care than simply the implied covenant of good faith and fair dealing).
(59) Rubin, supra note 43, at 232.
(60) See infra Part IV.A.
(61) See infra Part IV.B.
(62) See Gillian K. Hadfield, Problematic Relations: Franchising and the Law of Incomplete Contracts, 42 SWAN. L. REV. 927, 961-62 (1990); Elizabeth C. Spencer, Consequences of the Interaction of Standard Form and Relational Contracting in Franchising, 29 FRANCHISE L.J. 31, 32 (2009). For empirical support, see infra Part IV.B.
(63) RICHARD J. JUDD & ROBERT T. JUSTIS, FRANCHISING: AN ENTREPRENEUR'S GUIDE 33--34 (4th ed. 2008); MARTIN MENDELSOHN, THE GUIDE TO FRANCHISING 48 (7th ed. 2004); Arthur I. Cantor, Federal/State Franchise and Dealership Laws, 677 PLI/Corp. 105, 114-15 (1990) (PLI Corp. Law & Prac. Course Handbook Series No. 677, 1990); Chinonis, supra note 46, at 238; Hess, supra note 16, at 338-39; John Stanworth & James Curran, Colas, Burgers, Shakes, and Shirkers: Towards a Sociological Model of Franchising in the Market Economy, 14 J. BUS. VENTURING 323, 334 (1999); Mika Tuunanen & Kimmo Hyrsky, Entrepreneurial Paradoxes in Business Format Franchising: An Empirical Survey of Finnish Franchises, 19 INT'L SMALL BUS. J. 47, 49 (2001); Anna Watson & John Stanworth, Franchising and Intellectual Capital: A Franchisee's Perspective, 2 INT'L ENTREPRENEURSHIP & MGMT. J. 337, 340 (2006); deLeo, supra note 43, at 122, 123-24.
(64) deLeo, supra note 43, at 123-24; Hess, supra note 16, at 338-39; Chinonis, supra note 46, at 238.
(65) MENDELSOHN, supra note 63, at 47-48; deLeo, supra note 43, at 123-24.
(66) deLeo, supra note 43, at 123-24.
(67) deLeo, supra note 43, at 124; Hess, supra note 16, at 339.
(68) JUDD & JUSTIS, supra note 63, at 219.
(69) Id. at 219-20.
(70) MENDELSOHN, supra note 63, at 96.
(71) See JUDD & JUSTIS, supra note 63, at 21, 34 (stating that 98.3% of franchisors offer initial training).
(72) See id. at 525; MENDELSOHN, supra note 63, at 94-95; Robert T. Justis & Peng S. Chart, Training for Franchise Management, 29 J. SMALL BUS. MGMT. 87, 89 (1991); Stanworth & Curran, supra note 63, at 334.
(73) See JUDD & JUSTIS, supra note 63, at 218-19 tbl. 8-2.
(74) See Scott Weaven & Lorelle Frazer, Investment Incentives for Single and Multiple Unit Franchisees, 9 QUALITATIVE MKT. RES. INT'L J. 225, 230, 233 (2006).
(75) Id. at 228, 229.
(78) Id. at 233.
(77) Id. at 233. But cf. Alden Peterson & Rajiv P. Dant, Perceived Advantages of the Franchise Option from the Franchisee Perspective: Empirical Insights from a Service Franchisee, 28 J. SMALL BUS. MGMT. 46, 53, 58 (1990) (concluding that while the availability of training may resolve a new franchisee's concerns, arising from a lack of prior business experience, "the motivations that drive franchisees into choosing the franchise format may not be as homogenous as supposed").
(78) JUDD & JUSTIS, supra note 63, at 527. Robert W. Emerson, Franchise Contract Interpretation: A Two-Standard Approach 55 (Jan. 30, 2013) (unpublished manuscript) (on file with author) (noting that a 2010 survey of franchise contracts found that 95% provide that the franchisor performs ongoing consultation services for the franchisee after the initial training).
(79) JUDD & JUSTIS, supra note 63, at 527.
(80) Id. at 213; MENDELSOHN, supra note 63, at 62; Emerson, supra note 78, at 55 (noting that 96% of surveyed franchise contracts referred to operating manuals, which the franchisor had the right to revise).
(81) JUDD & JUSTIS, supra note 63, at 214-15. See generally MENDELSOHN, supra note 63, at 61-66 (describing items that should be included in a franchise manual).
(82) Lorelle Frazer, Causes of Disruption to Franchise Operation, 54 J. Bus. RES. 227, 228 (2001); Jose M. Ramirez-Hurtado et al., Criteria Used in the Selection of Franchisees: An Application in the Service Industry, 5 SERV. BUS. 47, 53 (2011).
(83) See MENDELSOHN, supra note 63, at 81. [S]ome franchisors believe that the person with experience of their type of business will be more difficult to train in the franchisor's particular methods.... On the other hand, there can be some businesses where a background knowledge of the trade or technical know-how is essential and since it cannot be taught within an economically viable time frame the prospective franchisee must have the requisite basis knowledge. Id.
(84) Id.; Frazer, supra note 82, at 228; JUDD 8z JUSTIS, supra note 63, at 34; Steven C. Michael, Investments to Create Bargaining Power: The Case of Franchising, 21 STRAT. MGMT. J. 497, 501 (2000).
(85) See generally MENDELSOHN, supra note 63, at 80-81 (corporate franchisees).
(86) See generally id. at 81 (corporate franchisees). Indeed, empirical evidence indicates that franchisors prefer to contract with inexperienced franchisees. According to Judd and Justis, only 10.6% of U.S. franchisors in the employment and personal services franchise sector require prior industry experience from their new franchisees. JUDD & JUSTIS, supra note 63, at 18 tbls.1, 2. See also Ramirez-Hurtado et al., supra note 82, at 58, 59 tbl.6 (noting that previous experience operating a related business was one of the attributes least valued by franchisors in the service sector).
(87) See Kimberley A. Morrison, An Empirical Test of a Model of Franchisee Job Satisfaction, J. SMALL BUS. MGMT. 27, 28 (1996).
(88) Id. at 29, 30.
(90) Id. at 30.
(91) Peterson & Dant, supra note 77, at 50 tbl.1.
(92) Id. at 49.
(93) Id. at 50.
(94) Robert L. Anderson et al., Are Franchisees "Real" Entrepreneurs?, 4 J. BUS. & ENTREPRENEURSHIP 97, 99 (1992).
(96) Id. at 100.
(97) Patrick J. Kaufmann Franchising and the Choice of Self-Employment, 14 J. BUS. VENTURING 345, 353, 358 (1999).
(98) Russell M. Knight, The Independence of the Franchisee Entrepreneur, 22 J. SMALL BUS. MGMT. 53, 54 (1984).
(100) Id. at 56.
(101) Russell M. Knight, Franchising from the Franchisor and Franchisee Points of View, 24 J. SMALL BUS. MGMT. 8, 9-10 (1986).
(102) Nerilee Hing, Franchisee Satisfaction: Contributors and Consequences, 33 J. SMALL BUS. MGMT. 12, 13 (1995).
(103) Id. at 15, 17.
(104) Id. at 19.
(105) Scott Weaven & Carmel Herington, Female Franchisors: How Different Are They from Female Independent Business Owners?, 2006 ACAD. MARKETING SCI. REV. 1, 3.
(106) Id. at 13.
(107) John Stanworth, The Franchise Relationship: Entrepreneurship or Dependence?, 4 J. MARKETING CHANNELS 161, 162 (1995).
(110) Id. at 163.
(111) Jose M. Ramirez-Hurtado & Bernardino Quattrociocchi, An Update of the Franchisee Motivations: A Study in Spain, 4 J. APPLIED ECON. SCI. 210, 212 (2009).
(112) Id. at 213.
(113) See Lorelle Frazer et al., Power and Control in the Franchise Network: An Investigation of Ex-Franchisees and Brand Piracy, 23 J. MARKETING MGMT. 1037, 1048 (2007).
(114) See infra notes 142-46 and accompanying text.
(115) See infra Part IV.B.1.
(116) See infra Part IV.B.2.
(117) See THE FRANCHISE HANDBOOK: A COMPLETE GUIDE TO ALL ASPECTS OF BUYING, SELLING, OR INVESTING IN A FRANCHISE 100, 102-03 (2006).
(118) Id. at 39-41.
(119) See infra notes 148-65 and accompanying text.
(120) See infra notes 121-46.
(121) See Spencer, supra note 62, at 31.
(122) See id.
(123) See Hadfield, supra note 62, at 978 n.232 ("[I]nexperience of the franchisee . . . make[s] the identification of franchisor opportunism very difficult."). See generally Robert G. Lord & Karen J. Maher, Alternative Information Processing Models and Their Implications for Theory, Research, and Practice, 15 ACAD. MGMT. REV. 9, 14 (1990) (discussing differences in the way experts and novices process information).
(124) See Naomi Miyake & Donald A. Norman, To Ask a Question, One Must Know Enough to Know What is Not Known, 18 J. VERBAL LEARNING AND VERBAL BEHAV. 357, 357 (1979) ("IT]he ability of a person to think of an appropriate question on a topic matter is a complex function of the knowledge of that topic.").
(125) See Joseph W. Alba & J. Wesley Hutchinson, Dimensions of Consumer Expertise, 13 J. CONSUMER RES. 411, 419 (1987) (observing that the novices' lack of knowledge affects their ability to process available information).
(126) See BARBARA BESHEL, AN INTRODUCTION TO FRANCHISING 13-15 (2001), available at http://www.franchise.org/uploadedfiles/Franchise_Industry/Resources/Education__Foundation/Intro%20to%20Franchising%20Student%20Student%20Guide.pdf.
(127) Famous franchise directories include: "The Franchise Opportunities Guide," "The Executives' Guide to Franchise Opportunities," "Bond's Franchise Guide," "The Franchise Annual," "Franchise Handbook," and "How Much Can I Make?" Id. at 13.
(128) Major relevant franchise business publications include: Franchise Times, Franchising World, and Franchise Update. Id. 129 Id. at 14.
(131) Id. at 14-16.
(132) See THE FRANCHISE HANDBOOK, supra note 117, at 34-35.
(133) See id. at 35, 37-43. The FDD is a complex document which contains, as required by the FTC's rules, twenty-three specific items of detailed information about the offered franchise, its officers, and other franchisees. See FTC Issues Updated Franchise Rule, FED. TRADE COMM'N (Jan. 23, 2007), http://www.ftc.gov/opa/2007/01/franchiserule.shtm.
(134) See Navigate the Paper Trail, ENTREPRENEUR (Jan. 21, 2001), http://www.entreprenuer.com]article/36392.
(135) Such interviews may include an examination of the following business aspects: franchisor business experience, the total investment required to setup and operate a franchise, franchisor training plans, franchisor products, franchisor advertisement and marketing methods and plans, and the franchisor's ongoing business support to its existing franchisees. See BESHEL, supra note 126, at 27-29.
(136) Such interviews may include an investigation of the following business aspects: level of training, quality of products or service, level and promptness of support, operations and quality of the operations manuals, earnings potential/claims, and any problems or difficulties with the franchisor. See BESHEL, supra note 126, at 30-31.
(137) See Navigate the Paper Trail, supra note 134.
(138) See supra note 82 and accompanying text.
(139) See supra notes 87-97 and accompanying text; see infra notes 146-50 and accompanying text.
(140) See generally Merrie Brucks, The Effects of Product Class Knowledge on Information Search Behavior, 12 J. CONSUMER RES. 1, 3 (1985) (discussing how prior knowledge makes processing new information easier); Susan T. Fiske et al., The Novice and the Expert: Knowledge-Based Strategies in Political Cognition, 19 J. EXP. SOC. PSYCHOL. 381, 384-85 (1983) (explaining the advantages that experts have in comparison to novices); Omri BenShahar & Carl E. Schneider, The Failure of Mandated Disclosure, 159 U. PA. L. REV. 647, 726 (2011) (stating that novices often have trouble understanding necessary information due to a lack of expertise).
(141) Andrew A. Caffey, Franchise Research Basics: How to Compare Similar Opportunities, ALL BUS., http://www.allbusiness.com/franchises/buying-a-franchise/13420130-1.html (last visited Jan. 15, 2013).
(142) See Alba & Hutchinson, supra note 125, at 419. See generally John Kim et al, Consumer Expertise and the Vividness Effect: Implications for Judgment and Inference, 18 ADV. CONSUMER RES. 90, 90 (1991) ("Novices are likely to under-process information because they lack the cognitive resources required to construe the inferential implications of a large set of product-related information.").
(143) See Alba & Hutchinson, supra note 125, at 419 (explaining how novices often disregard important information because of their lack of knowledge).
(144) See id. (explaining that novices take this course because decision-making becomes easier).
(145) See Robert A. Baron & Michael D. Ensley, Opportunity Recognition as the Detection of Meaningful Patterns: Evidence from Comparisons of Novice and Experienced Entrepreneurs, 52 MGMT. SCI. 1331, 1340 (2006) (discussing how lack of experience leads to many failed business ventures); Meryl Paula Gardner, Advertising Effects ou Attributes Recalled and Criteria Used for Brand Evaluations, 10 J. CONSUMER RES. 310, 312-13 (1983) (discussing the possible effects of advertisements on unfamiliar consumers); Akshay R. Rao & Kent B. Monroe, The Moderating Effect of Prior Knowledge on Cue Utilization in Product Evahtations, 15 J. CONSUMER RES. 253, 255 (1988) (explaining that consumers who aren't familiar with products could use price to judge quality); Fred Selnes & Sigurd Villads Troye, Buying Expertise, Information Search, and Problem Solving, 10 J. ECON. PSYCHOL. 411, 415, 425 (1989) (explaining that novice consumers make purchasing decisions based on simple factors like color and size).
(146) See infra Part IV.B.2.
(147) See infra notes 148 65 and accompanying text.
(148) Morrison, supra note 87, at 30, 31 tbl.2.
(149) Id. at 31 tbl.2.
(150) Anderson, supra note 94, at 99.
(151) Id. at 100.
(152) See supra note 56 and accompanying text.
(153) See supra notes 98-112 and accompanying text.
(154) See supra notes 98-112 and accompanying text.
(155) Frazer et al., supra note 113, at 1044.
(156) Id. at 1048.
(157) Scott Weaven et al., New Perspectives on the Causes of Franchising Conflict in Australia, 22 ASIA PAC. J. MARKETING & LOGISTICS 135, 138 (2010). 1 Id. at 148.
(158) Id. at 186.
(159) John Stanworth, Franchisiug and the Franchise Relationship, 1 THE INT'L REV. RETAIL, DISTRIBUTION & CONSUMER RES. 175, 183-84 (1991).
(160) Mark Hatcliffe et al., Prospective Franchisees, iu 1 FRANCHISING IN BRITAIN REPORT 1, 4 (1995).
(162) Id. at 9 fig.9.
(163) Andrew C. Selden & Rupert M. Barkoff, Counseling Franchisees, in FUNDAMENTALS OF FRANCHISING 289, 291 (Rupert M. Barkoff & Andrew C. Selden, eds., 3d ed. 2008).
(164) Spencer, supra note 62, at 32; See also Robert W. Emerson, Franchisees Without Counsel: Presumed Competent 10-11 (Jan. 12, 2012) (unpublished manuscript) (on file with author) (detailing a 2008 survey of franchisor attorneys who found that a large number of prospective franchisees were completely unrepresented or were poorly counseled about federal and state franchise laws and the interpretation thereof).
(165) Roberta Maynard, Choosing a Franchise, 84 NATION'S BUS. 56, 62R (1996).
(166) See supra Part III.
(167) See supra Part IV.A.2.
(168) See supra note 120.
(169) See supra notes 125-37 and accompanying text.
(170) See supra notes 138-41 and accompanying text.
(171) See supra notes 142-46 and accompanying text.…
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Publication information: Article title: Are Franchisees Well-Informed? Revisiting the Debate over Franchise Relationship Laws. Contributors: Emerson, Robert W. - Author, Benoliel, Uri - Author. Journal title: Albany Law Review. Volume: 76. Issue: 1 Publication date: Fall 2012. Page number: 193+. © 1999 Albany Law School. COPYRIGHT 2012 Gale Group.
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