Bill regulating franchise contracts gets tentative OK

A Democratic-sponsored bill regulating franchisors’ ability to terminate contracts with a franchisee passed a House committee with bipartisan support, but Republicans say the bill needs improvement before it’s ready for the floor.

The House Commerce Committee passed HB2404 on Feb. 14 in a 9-1 vote. The bill is sponsored by Rep. Stacey Travers, D-Tempe, and is intended to protect franchisees from getting caught into a contract they would have likely not signed after the franchisor sells the business to a private equity firm.

“I have spoken to several Republican members both in the Senate and here in the House who have expressed an interest that we need this kind of regulation – this protection for franchisees,” Travers said during the hearing. “I’m very hopeful that going forward, there’s more dialogue that we can have.”

The bill prohibits a franchisor, who typically owns a large commercial brand like McDonald’s, from terminating a contract with a franchisee, who is the small business owner who owns a franchisor store, “except for good cause.” It also would require a franchisor to provide written notice if they intend to terminate or not renew the contract. Franchisors would also be prohibited from preventing a franchisee from selling or transferring the franchise.

The bill is largely inspired by Tiffany Cianci, who became a franchisee of The Little Gym, whose headquarters is in Arizona. The New York Times reported that The Little Gym was acquired by a private equity firm called Unleashed Brands. The firm then demanded higher fees and more business operation requirements of Cianci, leading her to accruing $300,000 of debt and being caught in a court battle with Unleashed Brands.

Cianci told lawmakers little is known about situations like hers because often franchisees are locked in arbitration court battles and franchisees have non-disparagement clauses that prevent them from speaking out.

“It’s unspeakable the types of actions that have been carried out during the ordeals that not just myself, but hundreds of franchisees across the country, are going through on a daily basis,” Cianci said. “These are not Arizona companies that are hurting your franchisees. They’re billionaires from California and Texas and Washington that are acquiring firms, firing Arizona employees, and then they’re extracting revenues from franchisees here,” she added.

The lone dissenting vote against Travers’ bill was from Rep. Matt Gress, R-Phoenix. Gress criticized Travers for not discussing the bill with major stakeholders, including the Arizona Chamber of Commerce and Industry and the Greater Phoenix Chamber of Commerce, which he said informed him that they opposed the bill.

He also said that the first state to enact legislation that offered similar protections to franchisees was California, and only 13 states have enacted similar legislation.

“I’m not doubting that there are concerns that constituents have brought to this hearing. But to me, this is a California sledgehammer that deserves a much more thoughtful approach,” Gress said.

The day of the hearing, the International Franchise Association sent a letter to committee members expressing its opposition to the bill. The letter states that the bill has “far-reaching and harmful ramifications for franchisors, franchisees, and the Arizona economy” because it would undermine the enforcement of franchise contracts and promote litigation between franchisees and franchisors.

“HB2404 legislation is government overreach in its most obvious form, inserting Arizona as a third party in private contracts between franchisors and franchisees,” the association letter said.

Travers said the association’s letter contradicted its stance on the California law and cited a 2015 article written by association Vice President Jeff Hanscom, calling its lobbying efforts a success from the year California enacted its similar provision. The association’s membership is comprised of franchisors.

The American Association of Franchisees and Dealers also provided a letter supporting the bill.

Other Republicans were torn on the issue and recognized the concerns Gress mentioned and the lack of communication with major stakeholders. They voted for the bill but said they would likely vote against it on the floor if it remained in its current form.

“I’m a big supporter in the right of individuals to enter into a contract,” Rep. Justin Heap, R-Mesa, said as he explained his vote. “The problem that we have here is that we have individuals who have entered into a contract, and then a third party steps in and says ‘this contract is now null and void.”