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Self-regulation: a fresh approach to franchise relations. (Mediation. Arbitration. Litigation).

In any relationship, the potential for disagreements and misunderstandings exists, and the franchise relationship is no exception. Litigation and government regulation are ways to deal with such problems, but both often result in irreparable damage rather than real solutions. As with a marriage, by the time the parties involved go to court, an unpleasant divorce is often the outcome. Recognizing this, the International Franchise Association and its members created a multi-faceted self-regulation program designed to offer alternatives to resolving disputes between franchisors and franchisees, and beyond that, to create a climate that minimizes the potential for conflict.

In 1993, the International Franchise Association (IFA) invited franchisees into its membership for the first time since it was chartered in 1960, setting in motion changes that redefined the entire franchise community. While the association had always promoted fair and equitable relationships among franchisors and franchisees, the active involvement of franchisee members .in its activities and deliberations opened the door to new avenues Of understanding, contributing to the development of IFA's self-regulation program.

Currently the program includes a strong code of ethics, online educational programs for franchisor compliance and investor awareness, the IFA Ombudsman Program, endorsement of the National Franchise Mediation Program, and most recently, assumption of responsibility for administering the National Franchise Council (NFC) Alternative Enforcement Program. The self-regulation program's five components have evolved as the franchisee and franchisor members of IFA worked together to find solutions to the challenges encountered in franchising that are more effective than litigation or government regulation.

"There has been, over time, an almost seamless integration between franchisors and franchisees in the IFA? said Russell Frith, CFE, IFA chairman and CEO of Lawn Doctor, Inc. Frith notes that Steven Siegel, a franchisee of Dunkin' Donuts, has just completed his term as IFA's first franchisee chairman. Additionally eight franchisees now serve on the board of directors and another franchisee, now secretary-treasurer, will be chairman in 2005. "I think there is an acknowledgement on both sides that there is a genuine and continuing need for the success of the other party in the equation," Frith continued. "We have to create every conceivable device that we can within reason to enhance the opportunity for good, clean ongoing relationships between franchisee and franchisor."

IFA Secretary-Treasurer Lawrence "Dr Cohen, CFE, is CE of Doc & Associates, franchisee of 14 Great American Cookies and two Pretzel Time outlets. As one of the first franchisees to join and become active in the association, Cohen sees a "remarkable improvement" in franchise relationships over the past 10 years. "There has been less and less of a line drawn between franchisee and franchisor and more of a feeling that we are all in franchising and are franchise partners. I think we have shown without a doubt that we have improved our systems by having open channels of communication and doing things like the self-regulation program, which shows that we all want to do the right thing."

Doing the Right Thing

While litigation and government regulation may have a goal of "doing the right thing," both often lack the basic understanding of franchise relationships needed to effectively accomplish those goals. "IFA's self-regulation initiatives are designed to provide real solutions to the challenges that sometimes face franchisors and franchisees," said IFA Executive Vice President Matthew Shay. "We believe the program of self-regulation we have created provides a cost-effective and efficient solution that will permit them to focus their efforts on building their brands and minimize any disruptions to their relationships that might result from occasional disputes."

Les Wharton, who chairs IFA's Corporate Counsel Committee and is vice president, legal affairs for the franchise and license division of Spherion Corp., commented, "We felt one of the roles of a trade group is to insure that the public perspective of the group is positive, so you don't end up with a public or lawmakers who decide that more law needs to be enacted to control or govern the group. That's what self-regulation is all about, to make sure you don't have people within the franchise community doing things that are inappropriate."

Larry Schauf, CFE, executive vice president, general counsel and secretary of Jack In The Box, Inc. and a member of IFA's board of directors added, "Having franchisees and franchisors in the same organization, accepting the same kind of remedies and procedures for resolving disputes, is much preferable to government intrusion."

"Franchising has a strong element of entrepreneurism," he continued, "and the last thing you want in entrepreneurism is too much government involvement. We have always endorsed and embraced full disclosure by franchisors, but we think that is sufficient. Too much government interference could kill the goose that lays the golden franchise egg."

System-wide Membership

A growing franchisee membership in IFA is essential to insure the association's self-regulation program truly represents the entire franchise community. To that end IFA's system-wide membership program offers franchisor members the opportunity to enroll all of their franchisees as members at the same time, either by supplying franchisee e-mail addresses for IFA to enroll them directly or by asking them to sign up individually. More than 6,000 franchisees already have joined through this program, and IFA is actively recruiting additional systems to participate. "System-wide membership is a key to get more franchisees involved, because we are really in the business of preserving and protecting franchising." Frith said.

"As there becomes a broader understanding of the issues, and IFA is able to demonstrate that we can be a voice in impacting issues that affect franchisees, such as regulation or legislation on minimum wage, health care, depreciation--things that really affect franchisees in a very clear, non-abstract way--as that manifests itself, we will see more and more systems having system-wide membership in IFA."

Step-by-Step Solutions

"IFA's self-regulation program is structured in such a way as to provide an appropriate alternative at every stage of a possible dispute," Shay explained. "So depending upon where the system or the franchisee is--where the dispute is along that continuum--and depending on what kind of assistance you need to get the dispute resolved or avoid a dispute, you can pick and choose a la carte from this menu of options."

Online education-is the first step on the self-regulation ladder, with two separate programs, one designed for franchisors and one for prospective franchise investors. "If you are a franchisor who needs assistance in complying with franchise disclosure law or if you are a potential investor in a franchise and you want to know more about your options or what you should be looking for, you can take advantage of the online educational programs. It's very easy to do, very cost effective," Shay said.

The second step is designed to help a franchisor or franchisee who needs help in resolving an issue. At this stage, the IFA Ombudsman provides a confidential third party to help talk through the issue and offer impartial assistance in resolving the dispute. Shay reports there have been about 30 matters referred to the IFA Ombudsman over the past two years on a wide range of issues relating to encroachment, termination, sourcing and supply and other issues.

"The ombudsman's role has been to engage the parties in some creative thinking and some independent counseling and try to assist both in considering alternative options to resolving the dispute," Shay said. "This has been very effective at helping keep the parties focused on the business as opposed to becoming consumed with the dispute. Sometimes those conversations with the ombudsman have proved sufficient to completely address the issues that were creating the problem. We encourage people to start with the ombudsman before going any further."

For those disputes needing a more structured approach, IFA has endorsed the National Franchise Mediation Program (NFMP). Established in 1993, the NFMP program is administered by the CPR Institute for Dispute Resolution and is governed by a steering committee comprised of equal numbers of franchisee and franchisor representatives. Any franchisor can join the NFMP, which draws its mediators from a panel of over 200 prominent attorneys located throughout the United States.

Larry Schauf was instrumental in starting and implementing the NFMP. "At the time it was done by a group of franchisors separate from any organization, because back then IFA included only franchisors, and we wanted to make sure it was seen as a good faith effort by one side of the issue to do it right and fair."

Schauf reports the NFMP has enjoyed tremendous results. "So far, when a case was submitted by both parties to the NFMP, above 90 percent were solved to the satisfaction of both parties. That is one of the most interesting things about mediation and this program. It not only has a high success rate, but that means that both sides are happy because neither side has to settle if they aren't. It is only a win-win situation; it can never be a loss for anybody."

The most recent addition to IFA's Self-Regulation Program is the Alternative Franchise Sales Law Enforcement Program, which was developed by the National Franchise Council (NFC) in 1998. NFC, which became a division of the IFA in March, has administered the program to 30 franchisors referred by the Federal Trade Commission and state agencies. The program provides comprehensive franchise sales law compliance training and is a cost-effective and efficient mechanism by which to deliver remedial compliance training to franchise systems that have committed minor or technical violations of franchise regulations.

Doc Cohen views the alternative enforcement program as an important part of the self-regulation initiative because, "This is the piece that educates franchisors on how to do it."

Cohen explained, "My view is that most franchisors do not intentionally go out and violate the FTC Rule. Most franchisors want to be doing franchising right. It is such a complex set of rules that there are times when there is a violation. And if some newer franchisors who come in perhaps need the remedial education, the NFC program provides that piece."

The final and perhaps most important element in the self-regulation program is IFA's Code of Ethics, which demonstrates that the IFA and its members subscribe to the highest levels of trust, integrity and honesty.

"I think the Code in and of itself carries a lot of weight and sets the baseline for self-regulation," said Frith. "We have the Code and we say we are going to enforce that Code, and we are going to make sure you understand what franchising is about and how to conduct yourself. I think the clearer things are made, the less likelihood there is of conflicts. And certainly the ability to remove somebody from the association if there comes a 'point in time that someone has clearly breached the Code, that puts teeth in it."

Les Wharton believes the Code offers the overlying guidelines that tie the entire program together. "If you overlay the context of the Code of Ethics that we adopted some years back to guide our membership in, among other things, their relations with franchisees, all of these things work together to assure that franchisees feel, if they cannot resolve a problem directly, they have other choices. They have a safety valve."

Education and Communication

The remaining task for IFA's self-regulation program is to continue to educate the franchise community as to its availability and benefits to franchisees and franchisors.

"I think the challenge we have is endorsement and communication," Doc Cohen said. "We need to make sure we educate everyone about the program, what it will do, what it won't do, and how to take advantage of it. Then I think the program will speak for itself. It has already. People who have used it so far are very pleased with the results."

As more of the franchise community understands and embraces the program, Frith said everybody wins. "We have a more enlightened franchisee. We have one that feels more comfortable in the process because there are these different devices. We have franchisors who are more understanding and educated as to the appropriate process. So as a result, you have a better environment for an entrepreneur to own a small business. It all wraps together with a big benefit back to the general public and the economy."

The National Franchise Mediation Program (NFMP)

The National Franchise Mediation Program (NFMP) was created in 1993 by a group of International Franchise Association franchisor members who wanted to provide an alternative dispute resolution mechanism designed specifically for the franchise community and dedicated to resolving franchise disputes and preserving franchise relationships. Since its founding, the NFMP has facilitated resolution of nearly 90 percent of the disputes submitted to the program for mediation.

IFA endorsed the program from its inception, embracing the concept that franchise relationships are uniquely interdependent business relationships in which effective communication, trust and conflict resolution are of paramount concern. In order to facilitate creative approaches to resolving disputes that sometimes arise in franchise relationships, and preserving the stability of those relationships for the long-term, IFA has actively promoted the NFMP as an effective alternative to traditional methods of conflict resolution, namely lawsuits and litigation.

Originally founded by and for franchise systems, the Steering Committee of the NFMP now includes equal numbers of representatives of both franchisors and franchisees. The diversity of the NFMP Steering Committee reflects the joint commitment of both franchisors and franchisees to promote, publicize and encourage utilization of the NFMP by all members of the franchise community. Current members of the Steering Committee include IFA board and franchisee member William Hall, one of the first franchisees invited to join the Steering Committee, and recent additions to the Steering Committee include representatives of the Asian American Hotel Owners Association (AAHOA).

The Steering Committee is committed to finding new opportunities to publicize the existence of the NFMP, and several members of the Steering Committee recently conducted a "mock mediation" during a general session of the AAHOA annual meeting and convention. The NFMP is regularly promoted and featured at franchise system and franchisee association meetings as a way in which to educate the franchise community about this effective means of dispute resolution.

For more information about how your system can take advantage of this program, contact Peter Philips, NFMP director at 202-949-6490 or

Polly Larson is a freelance writer based in Snow Hill, Maryland. She was editor of Franchising World for 14 years and now contributes frequently to the magazine.
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Author:Larson, Polly
Publication:Franchising World
Geographic Code:1USA
Date:Jul 1, 2003
Previous Article:The legal atmosphere of franchising. (In This Issue).
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