Two Words that Changed the Face of Franchising

For four years – between 2011 and 2015 – a group of business owners representing the biggest names in franchising joined with a team of lawyers and consultants to amend the California franchise law and level the playing field in a sector of the U.S. economy responsible for nearly $500 billion in gross domestic product.

It wasn’t easy. There were many losses and too few victories in the early stages, but the group never lost hope. Last fall, their countless hours of unpaid work paid off. For the first time in a decade, a state law was changed to offer new protections to franchise owners.

DDIFO played a significant role in the effort. As a charter member of the Coalition of Franchisee Associations (CFA), DDIFO was one of the entities providing capital and resources for the group, which secured a bi-partisan bill that was signed into law by a governor who had earlier vetoed a similar measure.

This bill’s back story is filled with dates and details; meetings and memos; negotiators and naysayers. But, what it ultimately came down to was the perseverance of the group and the idea that two words could change everything.

“It’s a property rights issue. Why does a franchisee’s possessions become the franchisor’s possessions if he gets legally terminated? Aren’t property rights a basic tenant of the free market system?”

— Keith Miller

Monetized Equity

Keith Miller is a long-time Subway franchisee and chairman of the CFA. He boils the battle down to these words: Monetized Equity. Miller has said them so many times, but when he repeats them it’s with a trace of epiphany, as if he had just thought of it that very moment.

“The term came directly from the IFA’s [International Franchise Association] statement of guiding principles. We took the paragraph from there and inserted it into our bill. It said, basically, ‘If you terminate someone they have the right to monetize the equity they have invested in their franchise,’” he says.

The language fit perfectly. It didn’t hurt that the words came directly from the CFA’s chief opponent. For years, IFA had vigorously opposed any attempts to change franchise laws, anywhere. Now, Miller and the group thought they might have the leverage necessary to get the IFA to the bargaining table and identify some common ground where they could work together to change the law.

CFA Vice-Chairman Rob Branca, a trained attorney, who also operates a network of Dunkin’ Donuts locations and serves on the Brand Advisory Council (BAC), thought the IFA language dovetailed beautifully with the Universal Franchisee Bill of Rights, a 2011 fairness doctrine adopted by the CFA, which states, “Termination shall not occur without good cause, and termination shall not compel payments of liquidated damages or early termination fees.”

Branca saw the opportunity to engage directly with the IFA and build a consensus for a bill that would satisfy IFA’s interests while also providing stronger protections of franchisee equity during transfers or terminations. Branca had good relationships with IFA leaders and believed that there were several core principles on which both groups commonly agreed, and could be the foundation for negotiation.

“For us, the bill had to have language that allowed for franchisees to monetize their equity,” says Branca. “We also strongly believe that franchisors need the power to protect the integrity of the trademark as well as the business equity built by its franchisees. We all should be on the same page about that—and we were. They’re protecting our business equity as much as their own intellectual property.”

“It’s a property rights issue,” says Miller. “Why does a franchisee’s possessions become the franchisor’s possessions if he gets legally terminated? Aren’t property rights a basic tenant of the free market system?” Miller questions rhetorically.

That question stuck with John Gordon, principal of Pacific Management Consulting Group and DDIFO’s restaurant analyst. Gordon, who lives and works in California, was one of the key members of the team that included Miller, Jas Dhillon, the chair of the political action committee created by 7-Eleven franchisees and Branca.

“We saw this as a non-partisan issue because Democrats and Republicans agree on the importance small businesses play in California’s economy and society,” Gordon says. “But, a potential franchisee may say, ‘How can I invest in this business and then have it taken away from me?’”

Indeed, as Branca points out, franchising has changed—and now attracts more very large multi-unit owners and institutional investors, financed with capital from private equity funds. Many of those people were in attendance at the 2012 Multi-Unit Franchising Conference when, as Branca recounts the story, Bill Hall, a Dairy Queen franchise owner and former IFA board member, publicly criticized franchise agreements as unfair, at one point asking a panel of franchisors, “Would you ever sign your own franchise agreement?”

“This was the first time that the previously unspoken controversy was voiced in such a prominent forum populated by both franchisors and franchisees. Pointedly, this conference was held as Miller was shuttling back and forth from the conference to Sacramento to testify in committee hearings on the bill, resulting in an early defeat to CFA’s efforts,” Branca says.

Talks with the IFA

Branca recalls a warm, September day in 2015, when he visited the K Street offices of the IFA to meet with its then-President and CEO Stephen Caldeira, who Branca knew well from his days as head of global communications at Dunkin’ Brands. Also at the meeting was Robert Cresanti, who had recently joined IFA to run government relations and would eventually replace Caldeira. Branca says it was a “breakthrough meeting,” and credits his colleague Aziz Hashim for getting everyone to the table. At the time, Hashim was vice chair of the IFA.

“We agreed on several core principles. We saw eye to eye on a number of topics and knew we had to continue conversations,” Branca says.

Over the years, Branca was one of several franchise owners who had an ongoing constructive dialogue and shared lobbying efforts with IFA over issues like minimum wage and sick leave pay.

“The collective work we did on these issues built a foundation of trust. So you knew the people you were dealing with were reasonable human beings,” he recalls. “We knew one another’s positions and could discuss them amicably even where we were not aligned.”

That explains, at least in part, how the monetized equity language found its way from the IFA’s core principles into a bill that group had been fighting for three years. In 2014 – despite fierce opposition from IFA – a Fair Franchising bill passed both the California legislative houses, only to get vetoed by Governor Jerry Brown.

Refining the Language

Keith Miller has spent his entire life in California. His career as a franchise owner began after Brown’s first term as the Golden State Governor (1975-1983); but he found himself in Brown’s crosshairs when, on September 29, 2014, the governor vetoed Senate Bill 610. Miller says certain language in that bill didn’t sit well with Gov. Brown, in part because it was not represented in any other franchising laws in any other states.

“We understood from the Governor and Assembly members that any language in the bill had to appear in laws in other states. They didn’t want to break new ground,” Miller says.

Branca, Gordon, Miller and the others saw a silver lining in that dark cloud. They felt if they could refine the language to address Brown’s concerns, they could refile the bill in 2015. They found a new champion for the effort, a former Subway franchisee who was now the California Assembly Floor Leader. Chris Holden, a Democrat from Pasadena, had agreed to be the primary author of the new bill (AB 525). Another Democrat, Bill Dodd of Napa signed on to be a joint author; then Speaker of the Assembly, Toni Atkins, signed on as a joint author. Gordon called that “a big time development.”

“Governor Brown gave us good guidance. One of his concerns was that both sides (IFA and CFA) were not aligned. He also wanted them to tone down the rhetoric. That provided a good starting point that none of the previous bills had,” according to Holden.

Inside the state capitol there had been a sense that a new franchising law was too contentious. IFA poured enormous lobbying resources into defeating the bill.

“We had to overcome that, and everyone worked hard to show that we had given up many of our requests. We had taken many amendments through the Assembly committees, yet it didn’t seem to slow the opposition.” And Miller says Holden himself had been targeted by the IFA because of his support.

The irony, Miller says, is that Holden, who is known around Sacramento as a lawmaker who will compromise – and, in the case of AB 525, actually accepted over 30 compromises – was being painted as someone who would not compromise and would rather rush votes through. The strategy backfired. “After that, it became difficult for the opposition to maintain credibility on franchise issues inside the General Assembly.”

Throughout the process the volunteers, known loosely as the California franchisee legislative reform team, had been holding weekly conference calls to keep their campaign on track. Once Holden and his legislative team came onboard, Gordon says, those calls took on an even more urgent tone. While his team was focused on making sure all i’s were dotted and all t’s were crossed, Holden was busy securing support from Democrats
and Republicans. In a key move, Holden stepped across the aisle to ask Assemblyman Scott Wilk, a Republican from Simi Valley, to be a joint author of the bill. Wilk agreed.

“In Sacramento the legislative agenda is big labor, big business and bigger government.  The little guy gets crushed.  Having owned three businesses in my lifetime, I am very pro-small business.  I thought my party should be leading the charge on this issue,” Wilk says.

The issue was also a bit personal. Wilk recalls an incident that happened to one of his close friends who owned a number of franchised restaurants and then branched out to open a wine bar. As Wilk tells the story, his friend was pressured by his franchisor to sell the wine bar, even though it didn’t directly compete with his franchises.

“He was informed to sell the wine bar or risk losing his five stores.  When you are a franchisee you should be a partner with the franchisor, not an indentured servant,” Wilk says.

Cautious Optimism

With Holden, Atkins and Wilk all signed on as co-authors, Miller and his team were cautiously optimistic. As the 2015 legislative session unfolded, AB 525, was introduced, complete with language reflecting other state laws. Leaders in both houses sent the bill to committee for discussion. The Assembly Judiciary Committee was first to approve the bill; then the conservative-leaning Assembly Business & Professions Committee passed it along. All of a sudden, the team was taking notice that they were no longer the underdog in this fight. Gordon remembers the realization that there was now a very good chance this bill could get all the way through and become a law.

That realization was crystallized on May 14, 2015—the day the bill first came to the Assembly for a floor vote. It was the second of two key moments Miller says changed the course of the battle. Heading into the vote, Wilk was certain he could deliver five Republican votes. With his vote added on, he told Miller they could count on six GOP votes. Miller remembers thinking the bill could squeak by. He was understandably excited when the final votes were tallied and it passed 56-12.

“That was the day the tide turned, and the opposition knew they were in trouble,” he says.

After that vote, the IFA stepped up negotiations with the CFA group. Later, the oil companies, who are franchisors to local gas stations but do not hold franchise agreements for the convenience stores that are paired with various gas brands, agreed to support the bill.

As the bill moved through the Senate side of the building, optimism grew. Soon, the bill passed through two Senate committees on its way to a successful floor vote. Additional amendments were added, setting the stage for a final Assembly vote.

On the day the bill would either live or die, Branca says he and the others were confident they had enough support to get a majority YEA vote. Still they were a bit surprised when AB 525 passed the Assembly 79-0, with one abstention.

“It was extremely sweet to have it passed unanimously and with support from both parties in both houses,” Gordon says.

“We never thought we would be unanimous. To pass what a year ago was probably the most contentious bill in the state capitol, where opposition paid millions to fight it, was so unexpected,” says Miller.

A Pendulum Swing

On October 11, 2015, California Jerry Brown signed Assembly Bill 525, which amended key provisions of the California Franchise Relations Act.

Branca calls the bill “a reasonable compromise,” and credits the collaborative efforts of the CFA and IFA to securing its passage.

“We mutually have a duty to protect the franchising business model; it’s incumbent on both sides. We all deeply believed that and that helped us find common ground for those issues about which we disagreed,” he says. “We frequently talked about this as we were crafting the language amending the bill. If not us, who? There were several other players that did not have any stakes in franchising’s success and we knew that we had to be the ones driving the bus, not them.”

Franchise industry watchers say this bill, at its core, tightens the rules which allow a franchisor to terminate an owner’s franchise agreement. And, in a nod to Miller’s theory on property rights, the law requires a franchisor to repurchase the franchisees’ assets upon termination.

Even though the IFA spent years fighting changes to the California law, it now accepts the new regulations.

“The legislature cannot be in a position to change the rules for franchise businesses every year and we hope that the signing of this bill into law marks a long-term resolution and that we won’t see similar bills for many years,” Dean Heyl, IFA’s vice president of government relations, said in a statement.

Miller has a slightly different view of the fight that took four long years.

“It’s not going to solve all problems in the world, but the pendulum was stopped and even swung back a little.”