Introduction
The business success of a franchise-based business enterprise depends on many independent variables.1 One of the factors that has received surprisingly little attention despite its growing importance is the manner in which important system decisions are made.3 Big decisions and small decisions alike can affect system results in immature or small systems as well as in sophisticated, larger, older organizations. Certainly strategic decisions such as positioning or acquisition of (or by) another company can profoundly impact the financial returns of franchisor and franchisee alike. Even seemingly small decisions, however, such as adding or deleting a product from the menu3, or an advertising campaign, or a siting decision which impacts an established franchisee, can also affect system welfare, especially in terms of cumulative impact, or as salt in the wound to an already troubled system.
This article explores issues of system governance in search of a more effective model for structuring modern business format franchise systems. It identifies the structural origin of dysfunctions inherent in traditional system governance arrangements, and proposes a different approach to system governance that reconciles the sometimes conflicting interests of a franchisor and its franchisees by means of a governance mechanism that emphasizes the parties' shared interest in the success of the franchise system as a whole.
Traditional Model of Governance
The traditional model of franchise system governance for most U.S. business format franchise organizations is based on older models of internal corporate governance. It reflects a hierarchy of authority in which certain classes of decision regarding the system as a whole or even the individual franchised business are allocated by contract to be made, unilaterally, by a single party.4 Customarily, for example, employment decisions for the franchised business are allocated entirely to the franchisee, while decisions concerning the content of the operations manual (detailing operating procedures, product inventory requirements, or fixture and equipment criteria) are allocated entirely to the franchisor. Some categories of decision are divided, such as site selection, where the franchisee is often required to find and obtain the site, and the franchisor to review and consent to the franchisee's choice. Even in the "split decision" areas such as siting, however, each side's function is performed unilaterally. But the vast majority of important decisions at both the system and unit levels customarily are reserved to the unilateral discretion and authority of the franchisor. Rarely if ever do franchise agreements call for collaborative or joint decision-making, or establish a mechanism or process for joint decision-making. The traditional model is depicted in Figure 1.
To the extent it is thought about at all, the reservation of most decision-making to the unilateral authority of the franchisor is justified by, and is cloaked in the trappings of, trademark ownership. The party who owns the marks reserves to itself the exclusive authority to make certain categories of decision which the licensee is then obligated to honor. Franchisor counsel with a basic understanding of federal trademark law will justify this structure by reference to the Lanham Act's allowance of licensing trademark rights to an independently-owned person or entity in the first place only on the condition that the trademark owner reserves and exercises sufficient control over the "nature and quality" of the goods and services offered by the licensee that the public is "not deceived" as to the origin or sponsorship of the products.5 This legal nuance is then leveraged into a business rationale that justifies contractual reservation of often absolute power to the franchisor to make a broad array of decisions affecting system welfare and, not coincidentally, also affecting the investment results of system franchisees, who are significant (if nontraditional) equity stakeholders in the franchise system. In effect, according to this "power franchising" school of thought, the law requires or at least justifies one party making most of the critical decisions unilaterally, and often without accountability.6
Also not coincidentally, these same "power franchising" contracts attempt through a variety of means to tilt the scales so that guess who wins all disputes that may arise in the course of the franchise relationship.
Now all of this probably makes some sense inside a traditional business corporation, where employees are common law "servants" with no equity investment in their jobs (although even there changes are beginning to emerge which devolve and disperse authority -- and responsibility -- for decision-making and business results down and out into the organization7). But nothing in the Lanham Act requires that a franchisor, in exercising its "control" over the "nature and quality" of its franchisees' goods and services, must take on the trappings of a banana republic dictator.
Dysfunctions of the Traditional Model
When the corporate model of system governance is translated to the franchise environment, what is lost in the transition is that the recipient of the decisions (usually, the franchisee) is not an at-will employee with no more investment in the enterprise than his time, but an equity owner of a significant stake in a discrete component of a networked business.8 In the franchise environment, an arrangement in which one equity participant reserves to itself at the expense of another equity participant exclusive decision-making authority over significant matters affecting the disempowered party's investment, is an invitation to problems in the relationship even if the franchisor is often "right" with the decisions it makes. If the franchisor is wrong in the decisions it makes, in terms of the impact on the franchisee of the consequences of the decisions, the fuse is clearly lit. To say that the disempowered party knew what he was getting into (by reading the UFOC), or that he is "only a licensee," doesn't change the outcome. Franchisors that think no further than their desire to retain power, authority and control, and fail to consider the long term impact of that reservation on the ongoing business relationship with their franchisees, plant the seeds of their own future troubles.9
Unilateral decision-making by the franchisor is a familiar process, with a predictable, inescapable outcome. The process under most business format franchise agreements, as drafted by franchisor counsel, is that most if not all foreseeable issues are decided by the franchisor in the exercise of its unilateral discretion. The inevitable result is that the ultimate success of the system depends on the unilateral decision-making capabilities of the franchisor and the disempowered franchisee too often ends up feeling alienated, angry, threatened and hostile, regardless of what the UFOC told him. Franchisee expectations are more cultivated by industry "rate of success" propaganda, company sales brochures, and franchisor rhetoric of "partnership," "teams" and "family" than by obscure boilerplate integration clauses, indemnification clauses and various other absolutions and risk-shifting provisions deep in the mountains of paperwork with which the investor is confronted. Later, when the investor's experience intersects the expectancy, it is not unusual for surprise, disappointment and frustration to ensue. This is not a recipe for a successful long-term business relationship.
Alternative Governance Structures
The traditional governance model is most often propounded as necessary to protect the integrity or the functioning of the system, but that position is transparently indefensible. Any number of other system governance processes can be postulated that would adequately protect the interests of the system and the owner's rights in the trademarks.10
What the traditional model usually represents is not the franchisor's objective responsibility for the welfare of the system, but fear by the franchisor (or its lawyers) that if it allows franchisees, individually or collectively, to participate in system decision-making, the franchisor's control, or perceived control, over the system will be diluted. Control, however, is not a proper criterion for determining the efficacy of system governance mechanisms. Nor does the legal framework surrounding ownership and licensing of federally-registered trademarks justify the traditional structure. Federal trademark law protects the consumer interest in consistency, quality, and honesty of representation concerning goods and services delivered through a franchised network. The law reflects a public interest in customers not being deceived as to the character and origin (or sponsorship) of goods and services, leaving it to trademark owners to figure out effective means of assuring such consistency of satisfaction of customer interests when the goods are delivered by a "related person," the franchisee. The numerous forms and structures of franchising in the United States are strong testimony to the wide variety of arrangements that have been developed to meet that objective.11 These include franchise arrangements where a corporate parent owns the marks which are franchised in turn by a subsidiary; two-tier autonomous subfranchisor structures; "development agents"; joint ventures; and others. These manifold arrangements suggest that the unilateral and absolute reservation of power that is characteristic of many single-unit franchise relationships is a matter of style, convenience and perhaps inertia, rather than legal necessity or business efficacy.
The "control" framework that assures consistency throughout the network can and should be administered by the franchisor, which is in most cases the owner of the trademark and the sponsor of the system. At the same time, however, the purported "system interest" is not well served by a governance mechanism that simply arrogates to one party unilateral, and often absolute, decision-making authority over system governance issues. At a purely practical level, for one party to be able successfully to exercise unilateral decision-making authority in the best interests of the system would require that party to have perfect information, perfect judgment, perfect foresight, and considerable wisdom. Few business organizations possess those characteristics. The result of the traditional model therefore often is to produce flawed decisions that (in terms of both process and outcome) cause dissention, alienation and distrust. These franchisors have their "control" but they also often have a very unhappy, dysfunctional and suboptimal system.
These dysfunctions in the traditional model of franchise system governance are driving an emerging recognition that the traditional "power franchising" model of system governance ("jurassic franchising" in the phrase of Rupert Barkoff) simply does not work. Empirical examples of their breakdown are growing in number. Within the last few years, more than one major national franchise system has suffered a significant reversal of business fortune as a consequence of unilateral decision-making by the franchisor.12 Franchisors are not alone in causing this kind of harm to a franchise system. In other cases, unilateral decisions by groups of franchisees (expressed through system litigation that got out of control, or was misconceived in the first place) have also resulted in substantial harm to regional and national brands and systems.13 The recurrent stories of franchise system discord reported in the popular media and the recurrent initiatives for statutory reform of franchising are still more evidence that traditional-model franchising has some serious structural dysfunctions.14
At the same time, another little recognized phenomenon of franchising, which is only now becoming documented in the academic literature, is the systematic disappearance of perhaps a majority of start-up franchise organizations in the United States, and the limited profitability generally of franchised businesses. These phenomena may be caused by economic factors most cogently identified by Dr. Timothy Bates (a professor at Wayne State University), which indicate that when all other factors are rigorously accounted for, franchised businesses as compared to comparable non-franchised businesses have significantly lower profitability and significantly diminished prospects for survival in their first five years of existence.15 These economic factors, combined with the theoretical and empirical dysfunctions of the traditional model of franchise system governance, reinforce the suggestion that a new model of system organization and governance is needed to sustain the vitality of franchising as an effective means of economic growth within the American and world economies.
The "Shared Business Enterprise" Model
At the 1996 Annual Forum in Phoenix, one new common law model for franchise system governance was proposed: the Shared Business Enterprise.16 The Shared Business Enterprise concept for franchising acknowledges that franchisors and their franchisees, in many instances, have substantially and intrinsically divergent business interests (e.g., licensor-licensee; seller-buyer; landlord-tenant) within the single brand umbrella of the franchise organization, and that as a consequence, to avoid conflicts of interest, dissention and eventual disabling of the franchise organization, a franchisor and its franchisees must identify and exploit a shared economic interest as the basis for development of the franchise organization.17 The Shared Business Enterprise model recognizes that both the franchisor and the franchisee have substantial equity interests in the franchise organization, and in the success of the system overall, and therefore that both profit from considering what is in the best interest of the system when making decisions that affect the system. This perspective is entirely consistent with a franchisor's duties to its shareholders. According to one author, "[A] franchisor must ... fulfill its obligations to its shareholder[s] by, among other things, making systemwide decisions for the best interests of the system as a whole."18 A rising tide lifts all ships.
Many of the traditional disputes that afflict franchise organizations can be handily resolved if the governance paradigm is changed. The reason traditional franchisor-franchisee disputes over such subjects as encroachment, competence, due process, positioning, strategic direction, marketing, and numerous other issues cannot be resolved today in a way that is satisfactory to both franchisors and franchisees is that the traditional model imposes a win-lose, zero sum, positional bargaining perspective on the part of both the franchisor and the franchisees, driven in part by fear that the other party may try to gain opportunistic advantage in the relationship. Traditional concepts of legal representation based on "zealous advocacy" of individual, parochial client advantage exacerbate this problem in the context of a franchise network.19 Franchisors acting on the advice of their counsel set these systems up and then wonder why their franchisees end up agitated, angry, alienated and uncooperative; they bemoan the threat of legislative initiatives that threatened franchisees may launch to protect their investment in the system; and they voice concern over a dwindling supply of quality investors to fuel the growth of their systems, or over their own franchisees' reticence to reinvest in the system.20
Traditional governance models fail to bring about good results in a growing number of situations affecting both established and newer franchise organizations. The business issues and occasional conflicts that arise in franchise relationships aren't going to go away, of course, but there is another way to drive growth, and to resolve problems when they occur.
By at least suspending if not discarding the outmoded, traditional perspectives and considering a new system governance process, franchise organizations can begin to identify and exploit their participants' shared interest in the common ground of increasing the welfare of the franchise organization or system as a whole. All that remains conceptually to allow fuller development of this win-win concept is the identification of a mechanism by which it can be brought about. The mechanism must properly acknowledge the economic interests of both sides in a successful, vital and growing system, as well as allaying the fears of each that the other will seek opportunistic advantage, or impair the system.21
The focus of the Shared Business Enterprise model therefore turns on this simple paradigm: system issues implicate system welfare, and require system solutions. Both franchisors and franchisees (acting both individually and collectively) can begin to focus more on one decisive factor in addressing all the traditional franchise system issues and disputes: what is in the best interests of the system? Proper consideration of what is in the best interests of the system allows both franchisors and franchisees, and their lawyers, to view disputes (whether bargaining disputes, or allocation of growth opportunities, or conflict resolution) from a different perspective which tends to focus more on strategic than short-term gain, and to minimize fear of the other party gaining opportunistic advantage. In this environment, issues (especially system issues) need not be left to the unilateral, arbitrary and absolute decision-making authority of any one of the participants in a franchise organization. Indeed, an objective assessment of what is in the best interest of the system can best be achieved through a collaborative process involving all key players, provided that the system's clear and compelling interest in swift, fair, and decisive decisions can also be honored in the process. An analogy can be drawn to the role of the home plate umpire in a baseball game. When all participants have confidence in both the objectivity of the decision maker and the fundamental design of the process by which decisions are made, all participants then trust the process, accept its outcomes, and the game moves on. The decision-maker is right much more often than it is wrong, decisions are made swiftly, the results are essentially fair, and the system (either the baseball game, or the conduct of the franchise system in the competitive marketplace) is well served.
A mechanism to implement this concept must reconcile the interests of the individual participants in the system for profit, risk mitigation, and return on investment (but not power or control for its own sake) with system interests, which are equally compelling and valid. These system interests include: assuring consistent adherence to accepted system objectives and standards; deterring and limiting deviant behavior threatening system welfare by any participant in the franchise organization, including expelling from the system participants, including franchisor employees as well as franchisees, whose behavior consistently and materially deviates from system norms; fostering innovation that assures fluid and effective competitive response to changing consumer preferences, competitive circumstances, and technological innovation; and achieving reasonably swift closure on system issues to avoid internal dissensions, deadlock or stagnation that can be lethal to franchise-based businesses.22
These are goals that both franchisors and franchisees can embrace equally.
The Shared Business Enterprise model provides a conceptual framework within which this mechanism can be implemented. The key question, "What is in the best interests of the system?", provides a yardstick by which the effectiveness of the workings of the new model can be measured, leaving only determination of a precise mechanism by which a franchise organization can transition from the increasingly dysfunctional traditional model to a more effective new model of system governance.
Institutionalizing Collaboration: The "System Agreement"
The solution, the mechanism by which system issues can be dealt with on a system basis in ways that advance the welfare of the system without threatening the legitimate business interests of any of the participants in the system, is to divorce system governance issues from the license agreement.
By removing system governance issues from the license agreement, the traditional franchise agreement will be narrowed substantially in its scope to deal only with local issues affecting the direct party relationship between the franchisor and its licensee and the individual business conducted by the licensee. System governance issues, rather than being repetitively dealt with by the franchisor in the traditional "I decide; I win" manner in every individual unit franchise, will be reserved to a separate "System Agreement", a formal contract negotiated between the franchisor and a collective body representing the interests of the franchisee community at large. The System Agreement gives franchisees an institutionalized participation in the decision-making process on issues that impact their investments in the system. It compels franchisees as well as the franchisor to accept responsibility for their participation in the governance process.
The System Agreement would set up a collaborative decision-making process (outlined below) and address in detail the following types of issues:
A statement of the purposes of the collaborative process; establishing a joint system governance council
Composition, role and responsibility of the franchisee representatives; assuring that they represent the franchisees' system perspective; assuring democratic process in the franchisees' association
A pledge by both sides to commit necessary personnel, time, information, money and other resources to make the process work
Budgeting procedures for the council
Regular meeting schedules and agenda setting
Areas of "jurisdiction for the process," which might include:
- changes in form or content of the standard unit franchise agreement
- changes in the operations manual
- criteria for the franchisor's decisions concerning default issues
- criteria for siting or territory definition
- system positioning and strategic planning
- marketing and advertising funds and programs
- engagement of auditors and other experts for the joint council
- amendments to the System Agreement
Confidentiality commitments
ADR procedures.
The individual unit franchise agreement would continue to deal with individual, local issues such as the grant of the franchise, training, support services, payment of license fees, duration, renewal and termination issues, facility development and relocation, implementation of system standards, and technical trademark usage provisions.
A major advantage of segregating system issues to a System Agreement between the franchisor and a single body representing franchisee interests is the way it facilitates strategic flexibility in the system and actually leverages the franchisor's leadership role in the system.23 As the system evolves over time in response to competitive pressure, internal innovation, technological change or other forces, many franchise organizations stumble due to the difficulty and glacial pace of amending and renewing numerous outstanding unit franchise agreements one by one, or alternatively forcing strategic change through an operations manual revision or other forms of economic and legal coercion. The ability to negotiate and implement system changes, once, with a single franchisee organization, clearly benefits the franchisor as much as it does the system.24
Parties to the System Agreement might include the franchisor, the independent franchisee association, and in some systems even a separate advertising co-op or association, and perhaps an autonomous national purchasing cooperative. In systems where no such cohesive franchisee association can exist, such as very new systems, systems with badly balkanized franchisee populations, or where franchisees are simply incapable of organizing the necessary association, this model will not work and should not be pursued. In systems where no such franchisee organization does exist, one should be organized with full cooperation and support by the franchisor. It is to the franchisor's advantage to require membership in the association as a condition to holding the franchise.
Governance over these system issues will be determined through a joint deliberative process, the outcome of which on any given issue will not be predetermined. The result should be a relationship between franchisor and franchisees that is a functional (but not legal) partnership, in which all participating members of the franchise organization feel that they are represented, empowered, focused, involved and enthusiastic.25 This is a recipe for a successful networked business involving separately owned and managed constituents.
The embodiment of this mechanism, established under the System Agreement, should be a council involving the senior executives of the franchisor, and elected representatives of the system-wide franchisee association. In the Shared Business Enterprise model, it is clearly in the interests of the franchisor to mandate universal membership in such an association, and at the same time to demand that the association act in a responsible, professional, democratic and diligent fashion with a view towards the best interests of the system as a whole.26
A growing number of franchise organizations have already implemented various forms of this type of collaborative governance arrangement, including such established national brands as Pizza Hut, Burger King, Cendant (various hotel brands), KFC, and Sylvan Learning Centers. A generalized representation of these systems' internal system governance structure is illustrated in Figure 2. Contrast this model with Figure 1.
The council must meet regularly, and irregularly as needed. It should be funded on a shared basis by the franchisor and by the association. It must have established rules of procedure, and a process for resolving deadlock that is swift, fair, objective and decisive. One possible way of resolving deadlocks would be to establish a bylaw, or a clause in the System Agreement, by which a deadlock between the franchisee and franchisor representatives on the council would be first referred to the franchisee community to determine (or reconfirm) the franchisee position by electronic or mailed referendum. If the referendum establishes that the franchisee community at large supports the franchisor's position on the issue, the matter is decided. If the community at large supports the franchisee representatives' position, the matter would be decided by immediate joint submission of the question to a pre-selected arbitrator under a process for "baseball" or "kamikaze" arbitration on written submission of page-limited briefs without hearing. The arbitrator would be constricted to select one or the other of the parties' positions without compromise or equivocation, and to do so within a pre-determined and short time frame. This process has the highly salutary effect of forcing both parties to the center based on fear that a radical or highly selfish position will simply induce the arbitrator to pick the other proposal. The arbitrator plays the role in the Shared Business Enterprise of the home plate umpire in a baseball game, and, as with the umpire making ball and strike calls in the rapid-fire course of the baseball game, the system wins, and the game goes on without disruption.
Franchisee associations are not labor organizations subject to the National Labor Relations Act,27 and therefore do not enjoy labor's exemption from federal antitrust law.28 It follows, therefore, that associations engaged in collective dialog with a franchisor must exercise the same cautions as any trade association, taking special care to avoid pricing collusion, collective decisions regarding particular siting or new participant entry decisions, or organized group boycotts.29 Still, what limited precedent exists in the area is consistent in suggesting that collaborative system decision-making for the system, driven by a focus on the best interests of the system, outside of those traditional "per se" areas of antitrust concern, is not by itself an antitrust issue.30 Suggestions that collective deliberations of this sort are inherently anticompetitive and likely to violate the Sherman Act do not withstand rigorous antitrust analysis,31 and may depend upon an unstated, unperceived and highly unfavorable premise that a single brand franchise organization by itself constitutes a "relevant market" for purposes of antitrust analysis, something no franchisor would desire or advocate.
Franchisee Responsibilities
Franchisees in this type of arrangement face significant challenges to which most have not heretofore had to respond systematically. Franchisees traditionally have tended to lack the system perspective that the franchisor, at least in theory, brings to bear on system governance issues. Franchisees will need to rise above their local and sometimes partisan outlook to approach issues from a systemic point of view. Franchisees involved in this process must be representative of their peers and invested with sufficient authority to speak for their constituents. Franchisees will also have to approach this process with a great deal of professionalism. Grandstanding to parochial constituencies will not serve the system well. They must resist the temptation to manipulate the process for personal or partisan advantage. They must recognize their own self interest in a healthy and smoothly-functioning system. Inappropriate emphasis on partisan advantage is just as corrosive to the best interests of the system when done by franchisees as it is when done by the franchisor.32
Franchisee participation can only be as good as the information available to the franchisee participants. This will require that many franchisors be considerably more forthcoming with system information, independent research, and other decision-basing information than has previously been the case. It may also require franchisees to engage their own professional advisors and conduct independent research in areas of accounting, finance, marketing and other disciplines, to provide them with independent professional guidance to enable them better to discharge their responsibilities to the system through their participation in the collaborative decision-making process. The system council that the Shared Business Enterprise model contemplates will certainly be an appropriate body to engage expert consultants on a joint basis in these areas as well.
Franchisees involved in the joint governance process must be expected to maintain appropriate degrees of confidentiality over system information shared by the franchisor or professional consultants, and franchisees not directly involved in the process must learn to respect the need of their elected representatives to maintain that confidentiality. This commitment to the welfare of the system will limit the amount, kind and timing of information disseminated by the franchisee leaders to the franchisee community. It will also demand that the franchisee community communicate liberally within its own ranks so that the franchisee representatives can be fully informed of both fact and opinion information pertaining to the interests of their constituents.
Ultimately, the franchisee participants in this process must come to understand that it is every bit as much in their own interest on matters of system governance to act in the best interest of the system as it is for the franchisor to act as a steward of the system in its leadership role for the system.
One of the most challenging tests of the Shared Business Enterprise-model joint governance mechanism will come when one member of the system engages in behavior that deviates significantly from system norms. This is most often thought of as a franchisee who engages in repeated, material breach of the franchise agreement, but it is just as possible that the problem will arise in connection with franchisor officials who themselves violate system norms of behavior with respect to fair, objective enforcement of franchise obligations and system values. It is inappropriate for reasons of both antitrust law and various common law contract doctrines for franchisees on the council to take a position on the merits relative to disciplining a fellow franchisee under these circumstances.33 But it is not unreasonable to expect the franchisor to outline its case against such a franchisee to the council, in executive session, for purposes of eliciting at most a "no action" position from the council before undertaking affirmative actions to separate a franchisee from the system. The franchisor would gain insight and perspective -- priceless feedback -- from this kind of critical review of a termination decision, and the system as a whole would benefit accordingly. By the same token, the franchisor should be expected to allow the franchisee representatives on the council to use the council as a forum for reviewing aberrant behavior by franchisor employees with a view towards making a recommendation to the franchisor that it undertake some appropriate disciplinary or corrective action. In neither case is a decision on the merits by the council necessary or appropriate to redress the threat to the system's welfare.
Conclusion
The "SBE" model is not a panacea for franchising, but it represents a potentially major step forward towards reconciling the often conflicting viewpoints and interests of franchisees and franchisors and realizing the full potential value of the franchise method of doing business.
Breaking many system governance issues out of the individual franchise agreement into an umbrella System Agreement between the franchisor and a system-wide franchisee association promises to enhance system welfare, hence the long-range economic interests of franchisor and franchisee alike in a healthy, functional, robust and growing franchise organization.
ENDNOTES
* This article is based on a paper presented at the 1997 Annual Forum of the ABA Forum on Franchising at Colorado Springs, Colorado, October 23, 1997.
1. See, e.g., Lewis G. Rudnick, Franchising: What Would I Change: Enhanced Understanding of the Essential Elements of Successful Franchising, 1997 ABA Forum on Franchising P1.
2. See, e.g., Martin Mendelsohn, The Guide to Franchising, at 155 ff. (Cassell Academic, London, 1992); T. Mark McLaughlin, D.G. Smith, M. Wisniewski, Empowering Franchisees: Franchise Participation in System-Wide Governance, 1994 ABA Forum on Franchising W-4 (hereafter, "McLaughlin"); R.W. Emerson, Franchising and the Collective Rights of Franchisees, 43 Vand. L. Rev. 1503 (1990); Real Talk: Successful Communication Strategies for Franchising, 1996 ABA Mid-Year Forum on Franchising (March 22, 1996).
3. See, e.g., E.S. Browning and Richard Gibson, "McDonald's Arches Lose Golden Luster," Wall St. J., Sept. 3, 1997, at C1; Martha M. Hamilton, "Taking its McLumps; After Series of Setbacks, McDonald's Strives to Fend Off Strengthening Rivals," Washington Post, Aug. 17, 1997, at H01; Barnaby J. Feder, "McDonald's Ends 55-Cent Sandwiches," N.Y. Times, June 4, 1997, at D1.
4. See, e.g., 27A West's Legal Forms, Specialized Forms, Franchise Agreements §§ 14.27-14.31 (Bradford Stone, et al. eds., 3d ed. 1996); Jacob Rabkin and Mark H. Johnson, 3 Current Legal Forms With Tax Analysis, Ch. 3A, Business Franchises (Matthew Bender 1997).
5. 15 U.S.C. 1055, 1127.
6. The very same school of thought that advocates power franchising also abhors any notion of franchisor responsibility for the consequences of its decisions under traditional common law doctrines, for example, the implied duty of due care. See, e.g., Robert T. Joseph, Do Franchisors Owe a Duty of Competence?, 1989 ABA Forum on Franchising at Tab 11.
7. See, e.g., William M. Lindsay and Joseph Petrick, Total Quality and Organization Management (St. Lucie Press, 1996); Jeff Hyman and Bob Mason, Managing Employee Involvement and Participation (Sage Publications, 1995); Kenneth H. Blanchard, et al., Empowerment Takes More Than a Minute (Berrett-Koehler 1996); Jeffrey Pfeffer, Competitive Advantage Through People: Unleashing the Power of the Work Force (Harvard Business School Press, 1996); David I. Levine, Reinventing the Workplace: How Business and Employees Can Both Win (Brookings Books, 1995); Geoffrey James, Business Wisdom of the Electronic Elite: 34 Winning Management Strategies from CEOs at MicroSoft, Compaq, Sun, Hewlett-Packard and Other Top Companies (Random House, 1996); Peter F. Drucker, The Executive in Action: Managing for Results, Innovation and Entrepreneurship, The Effective Executive (Harperbusiness, 1996); Richard S. Wellins, et al., Inside Teams: How 20 World-Class Organizations Are Winning Through Teamwork (Jossey-Bass, 1994); and, F.M. Stone and K. Sachs, The High Volume Manager: Developing the Core Competencies Your Organization Demands, 19 Credit Union Management No. 6, at 7 (Credit Union Executives Soc'y 1996).
8. The chairman of one major franchisor-oriented trade association wrote Congress in the early 1990s that it was the association's position that franchisees owned no equity in their franchise. That view does not appear to be widely held. It is a point of view that would astonish most franchisees.
9. "In diligent pursuit of their own objectives, both franchisee and franchisor want to control each of their businesses. This desire for control can also exacerbate the conflict that results from different objectives." McLaughlin, at 61.
10. See, e.g., A. Selden, R. Barkoff, D. Marks and M. Folks, Towards a New Franchise Paradigm, 1996 ABA Forum on Franchising P2. In other cases, franchise organizations function very successfully with franchisor entities that are franchisee-owned cooperatives. Some foodservice, lodging and merchandise chains are organized on this basis.
11. See, W. Michael Garner, Franchise and Distribution Law and Practice (Callaghan 1990).
12. See, e.g., R. Gibson, "Fast Food Spinoff Enters Pepsi-Free Era," Wall St. J., Oct. 7, 1997 at B1; S.N. Chakravarty and J.R. Hayes, "The Pure-Play Syndrome," Forbes, Oct. 20, 1997, at 209; S. Pulliam, "Pepsi's Fast-Food Spinoff May Cause Some Indigestion," Wall St. J., Sept. 17, 1997, at C1; N. Deogun, "PepsiCo to Receive $4.5 Billion In Spinoff of Fast-Food Business," Wall St. J., Aug. 15, 1997, at B6; J.A. Tannenbaum "Franchisees Want Voice at PepsiCo's Fast-Food Spinoff,", Wall St. J., July 17, 1997 at B2.
13. See, e.g., Siegel v. Chicken Delight, Inc., 448 F.2d 43 (9th Cir. 1971) (franchisee-plaintiffs won antitrust case challenging the structure of the franchise; franchise organization was crippled); similarly, the A&W system imploded after a class action lawsuit (never prosecuted to a reported decision) challenged the company's initiative to sell bottled and canned A&W root beer through grocery stores in competition with franchised root beer-and-hamburger stores.
14. See endnotes 2 and 11.
15. See, e.g., T. Bates, "Firms Started as Franchises Have Lower Survival Rates than Independent Small Business Startups," (Woodrow Wilson Center, Washington, D.C.); "Analysis of Survival Rates Among Franchise and Independent Small Business Startups," (Wayne State University); Scott Shane, Why New Franchisors Succeed (U.S. Small Business Administration).
16. See Selden et al., op. cit., endnote 8.
17. "Both franchisee and franchisor share a central and overriding common interest: the health and strength of the system and brand." McLaughlin, at 61.
18. Id.
19. Compare the newer Model Rules of Professional Conduct, Rule 1.3 (ABA) ("A lawyer shall act with reasonable diligence . . . in representing a client"; the Comment says: "A lawyer should act . . . with zeal in advocacy upon the client's behalf. However, a lawyer is not bound to press for every advantage that might be realized for a client. A lawyer has professional discretion in determining the means by which a matter should be pursued.") with the older Model Code of Professional Responsibility, Canon 7 (ABA 1969) (". . . a lawyer should represent a client zealously within the bounds of the law"; DR 7-101(A)(1) stated that a lawyer ". . . shall not intentionally . . . fail to seek the lawful objectives of his client through reasonably available means permitted by law and the Disciplinary Rules . . .".). Many other Code and Model Rules strictures, however, sanction overzealousness in advocacy. The Model Rules appear to have toned down the ardor required of lawyers, at least to a slight degree, inviting perhaps a broader view of what is in the client's best interests.
20. See Rudnick, op. cit., at endnote 1.
21. See Selden et al., op. cit., at endnote 8; McLaughlin, at 27.
22. Id.
23. "Increased franchisee participation in the decision-making process also may make it more likely that the franchisee community will "buy into" decisions. Such participation can empower franchisees individually and the system generally." McLaughlin, at 6.
24. McLaughlin, at 61-62.
25. Selden, et al., op. cit. at endnote 8.
26. Id.
27. Emerson, op. cit. (endnote 2).
28. Id.; McLaughlin, at 52-54.
29. McLaughlin, at 51.
30. McAlpine v. AAMCO Automatic Transmissions, Inc., 461 F. Supp. 1232 (E.D. Mich. 1978)(collective franchisee decision to leave the system en masse and start a new competitor if the franchisor launched a market saturation program not a "group boycott"); Williams v. I.B. Fischer Nevada, 999 F.2d 445 (9th Cir. 1993)(franchisor and its franchisees are not separate economic entities or interests capable of "conspiring" for purposes of Sherman Act analysis).
31. Contrast E. B. Wulff, Actions by Franchisee Associations: Antitrust and Other Legal Complications for Franchisors and Franchisees, 13 Fran. L. J. 1 (Fall 1993); with McLaughlin.
32. See McLaughlin, at 61.
33. See, e.g., American Motor Inns, Inc. v. Holiday Inns, Inc., 521 F.2d 1230 (3rd Cir. 1975) (collusive specific business siting decisions by franchisor in concert with franchisees violates Sherman Act as a horizontal market allocation scheme); and, Restatement (Second) of Torts § 766B (Intentional Interference with Prospective Contractual Relation: "One who intentionally and improperly interferes with another's prospective contractual relation . . . is subject to liability . . . for . . . (b) preventing the other from . . . continuing the prospective relation.") (1979) See also McLaughlin.