A partner in the law firm DLA Phillips Fox in Australia cites Iowa as an example of what happens when a government over-regulates franchisors.
“We have seen the effects of over-regulation in various countries and notably also the US State of Iowa where the franchising sector shrunk substantially and franchisors deliberately avoid franchising into Iowa, resulting in lost contribution to GDP and job creation. Various attempts were even made to have the 1992 Iowa Franchise Act declared unconstitutional as it is considered to unlawfully interfere in contractual relationships,” Conaghan said.
Is Iowa overreaching? You be the judge. You can read more about the drama in Iowa franchise law over the past 15 years here.
Iowa (link to current regulations) has gone to great lengths to protect the franchisee. Below are examples of the protections:
- restrictions on the franchisors ability to refuse a transfer,
- imposes financial liability on franchisors who permits encroachment that adversely impact a franchisee’s sales,
- restrictions on “good cause” for terminating or not renewing the franchise agreement,
- franchisors cannot require franchisees to sue in another state,
- good faith required in honoring the franchise agreement,
- independent sourcing must be permitted,
- very limited non-competes after the franchise agreement is terminated, and
- franchise agreement must apply Iowa law
Some of the current political debate in the United States revolves around regulations, which really means imposing rules on private contracts. Governments must balance regulations with encouraging businesses to operate in your region. In Iowa, many franchisors simply choosing not to do business there.
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Ryan is an attorney and valuation specialist residing in Chicago. He chronicles his thoughts and research on FranchisePundit.com. You may reach him by email ryanknoll@gmail.com or mobile telephone 312-715-8115.
I am not sure I grasp the innate loss in Iowa as the result of franchise regulation. Franchising is just a form of business, it is not like the regulation of franchises is affecting the ability of non-franchise businesses to proliferate. Oen might also argue that most franchise arrangements guarantee that a portion of revenue will be transferred out of state (via royalty and advertising) verses a local enterprise, thus reducing the multiplier effect in the local community and thus reducing revenue to the State.
In case it is not clear, I am simply stating that if there is a need for a good or service, many non-franchise enterprises can most likely fill the niche. The bonus may be that more money is more likely to stay in the community and State.
Sated a bit more tersely I fail to see the inherent disadvantage to the populace by ending up eating at Dale’s Deli and Subs verses Blimpies.
The DLA lawyer is correct.
I would also add that since it became illegal to have slaves, the cost of labor has risen dramatically in the South and this has impeded creation of economic wealth. And the imposition of restrictions on dumping toxic waste into the Mississippi has resulted in increased costs to manufacturers in the Midwest.
Next month, the Supreme Court will host a re-enactment of Muller v. Oregon [208 U.S. 412 (1908)], where the court upheld the conviction of an employer who violated a law limiting women’s work to 10 hours per day. A century later, and this restriction on the sacred Freedom of Contract has still not been overturned! And don’t get me started on all that other nanny-state legislation like OSHA and wage/hour legislation, and pollution laws etc.
The result of all this ill-advised legislation has been to push jobs overseas to places like China, where they still understand the value of prison labor and toxic smog.
Wealth creation is the raison d’etre of government, and it is high time that the mouthpieces of the powerful fight back against attempts to curb negative externalities.
As one of the world’s leading law firms and a major voice for the Fortune 500 corporations, DLA is fighting the good fight against the unwashed masses of democracy.
Kudos to them!