The Small Business Franchise Act

Originally introduced in 1998 and passed in 1999, the Small Business Franchise Act (SBFA) is has put into place certain safeguards designed to eliminate fraud and other activities that might exploit franchisee investors. Common opinion holds that the SBFA was introduced in order to give franchisees additional bargaining power against franchisors.
Michigan congressman John Conyers, Jr. stated that “Protecting the rights of franchisees is ultimately about protecting the rights of small businesses.”

The proof is in the details:

1) The bill reinforces existing prohibitions. The SBFA is a reminder that perpetuating fraud within the franchisor-franchisee relationship is prohibited.

2) The bill mandates good behavior and faith. Unsurprisingly, not everyone follows the rules in the world of franchising. The SBFA looks out for small franchisees by requiring all parties to act honestly with each other and observe reasonable standards of fair dealing in the industry.

3) The bill encourages franchisees to form trade associations. The SBFA clearly states that corporations cannot prevent franchisees from creating or joining trade associations. (As a matter of fact, membership in professional organizations is beneficial, and can enhance one’s knowledge of the franchising world).

4) The bill protects the franchise from unjust termination. A compulsory 30-day period must be given to the franchisee to cure any defaults, among other allowances.

5) The bill promotes free trade post franchise agreement expiration. Upon franchise agreement expiration, a former franchisee is allowed to engage in business anywhere but is prohibited from using the franchisor’s trademark, intellectual property, or trade secrets.

6) The bill protects franchisees against unlawful transfer of the business. Franchisees are particularly vulnerable to unlawful transfers due to the prevalence of mergers, leveraged buyouts and acquisitions. According to the SBFA, franchisees must be given 30 day’s notice of the franchisor’s transfer of ownership to another entity.

7) The bill gives a state attorney general permission to step in if necessary. Should a state attorney general believe that the interests of the state have been or are being adversely affected or threatened due to franchisor activities that violate the SBFA, the attorney general is allowed to bring a civil action on behalf of its residents in a U.S. District Court. In other words, the highest prosecutorial officer of the state can make sure that the SBFA is not being violated.

8) The bill allows franchisees the freedom to independently source goods and services. Rather than forcing franchisees to purchase materials from corporate headquarters at what can be an exorbitant price, the SBFA allows franchisees to purchase goods and services from sources of their own choosing (given that those materials meet reasonable, established and uniform system-wide quality standards dictated by the franchisor).

9) The bill imposes limited fiduciary duty on the franchisor. When handling the small businessperson’s money, the franchisor must provide its franchisees with the highest standard of care. Franchisors are obligated by the SBFA to give franchisees a full disclosure of disbursements and a full accounting of how the money is being used.

10) The bill enforces procedural fairness. It is unlawful for a franchisor to require any term/condition in the franchise agreement that violates the SBFA. This is very important, as it disallows a franchisor from restricting any benefits inherent in the SBFA.