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AAFD Chairman on Key Protections that Should Be in a Franchise Contract

    AAFD chairman Bob Purvin working on the words of a fairer franchise contract
Purvin leads franchisees & their franchisor to craft a fairer contract

Robert Purvin, founder and chairman of the American Association of Franchisees and Dealers (AAFD), spoke at length with this journal. Purvin is busy nowadays preparing the AAFD, a non-profit trade association that represents the rights and interests of franchisees, for a franchisee leadership summit from April 30 to May 3 in Palm Springs, California. The association will celebrate its 25th anniversary.

Besides being an attorney representing franchisees for some 40 years, Purvin is also the author of a book that is essential reading to any would-be franchise buyer or existing franchisee–The Franchise Fraud: How to Protect Yourself before and after You Invest. He has been a tireless advocate for franchisees and their rights for decades.

The AAFD's raison d'être is to help franchisees with a brand to collectively improve their franchise contracts by educating them and bring them to the bargaining table. It does so by building strong independent franchisee associations.

In this interview Bob Purvin speaks about some of the key protections that a good franchisee contract should have. The AAFD chairman cites crucial areas from its newest negotiated franchise contract with Griswold Health Care franchise owners.

SNIEGOWSKI: Give me an example of what franchisees can accomplish if they collectively negotiate. For example, one of your chapters is the GHCFA, or Griswold Home Care Franchise Association. Can you tell me what specifically Griswold franchisees obtained from their own independent franchisee association to collectively bargain with their franchisor instead of each business individually doing so?

PURVIN: Griswold has a unique way of operating a home care business that has made them very competitive in a very crowded industry.

Griswold is a business that interviews and recommends independent contract caregivers to their clients. It manages the caregiver representation without being the employer of the caregivers. That distinguishes it from most of its competitors. If you go to a Bright Star franchise, all the caregivers that they send out are employees of the franchisee.

The home care sector has probably more than a dozen franchisors—such as Comfort Keepers, Visiting Angels, and Bright Star. The AAFD has four chapters with four home care brands alone. Griswold and Bright Star are two of them.

Griswold introduces people to caregivers who are not just independent, but who also manage the care process the way Griswold tells them to. Griswold interviews the franchisees. They make recommendations to customers. The customer pays the [franchisee] caregiver directly and pays a separate fee to [franchisor] Griswold in order to manage that relationship. As a consequence of this arrangement, Griswold does not incur the costs associated with an employer. They have been able to undercut the competition in a way that the Department of Labor was not happy with because the government was not only unable to collect taxes from those in the past who would be employees, but also there was the concern that the [franchisee] caregivers were not being properly compensated [in employment wages and benefits].

A lot of the pressure over the last few years has been over minimum wage and wage and hour laws as it applies to [franchisee] caregivers, who were putting pressure on Griswold to hunker down and become like everyone else. But all of Griswold's franchise agreements had set up an independent contractor relationship. The company wanted to offer what they called a full employment model. Griswold tried to mandate some changes that did not go over well with franchisees. In that process a group of franchisees came to AAFD, formed a Griswold chapter of the association, and did everything according to our rule book and our recommended strategy. Franchisees simply wanted to be respected by the franchisor. They did not want their franchisor to think that they were coming to kill the brand. They weren't.

Over a process that took years, Griswold franchisees changed their franchisor. It was not done overnight. In the end, it was changed through new management who realized that the company needed to listen to its franchisees and be more collaborative. We got to the place where franchisees realized, "We have the wherewithal to stand up for our rights." This association has grown to represent about 80 percent of franchisees under the Griswold system. For the first three or four years, the chapter only represented about 30 percent of the owners. About 80 percent of the members are supporting the legal fund, which has now raised about a quarter of a million dollars. The company finally understood that this group of franchisees had the wherewithal to stand up for themselves. But the franchisor never, until recently, was willing to engage the association, even though they had to acknowledge them because of the Federal Trade Commission's rule that requires the franchisor to disclose the existence of a franchisee association in its Franchise Disclosure Document.

SNIEGOWSKI: Right. I heard with my own ears the FTC's franchise regulator specifically say that rule, where a franchisor has to disclose a franchisee association in its Franchise Disclosure Document, came from the AAFD's efforts. That change in federal law was a vision of yours from long ago.

AAFD chairman and founder Bob Purvin
Robert Purvin

PURVIN: Correct. One of the things I am very proud of is that AAFD is the only organization that is actually named in the FTC's Franchise Rule. There is a footnote that mentions that AAFD's chapters qualify as independent associations.

What happened in Griswold's case was that the franchisor showed that it was not going to recognize the association, but it would sit down and have a dialog with individual association members over the changes in its business model and the rewriting of its franchise agreement. It was a franchise agreement committee, to which franchisees could elect their representatives. All of the representatives that were elected were also leaders within the independent franchisee association. Everybody knew it. In that way the company took the first baby steps and unofficially recognized the association.

SNIEGOWSKI: Isn't it typical for franchisors to at first not want to recognize the existence of independent associations that represent franchise owners?

PURVIN: Yes. It is very common that a franchisor will start out by not recognizing an independent franchisee association. But I would remind franchisees that they need to earn the right of recognition, which the Griswold association did.

By the end of the negotiation there was a specific recognition of Griswold Home Care Franchise Association that was written into the franchisees' new agreement that we are so proud of. So franchisees went into the negotiation rounds without recognition of their association by the franchisor, but came out of the negotiations with full recognition.

Right now the relationship has been strengthened and both franchisees and franchisor are happy to be in business with each other. That is always the goal. That follows our philosophy of what the AAFD calls Total Quality Franchising. It is a franchise culture in which legitimate business needs of both the franchisor and franchisee are being met in a collaborative process that serves the brand.

I told Griswold franchisees that they need to go to the franchising company and ask about a common mission. That common mission would be something that both sides cherished – the success of the Griswold brand for their mutual benefit. And then they needed to agree to guiding principles that help to get to the common mission. I provided them with some language, which was embraced by all parties. The common mission is to the brand. The guiding principles are that the franchisees agree that Griswold gets to define what the system looks like with input from the franchisee association. Griswold agrees that they will respect the franchisees ongoing concerns about the value of their individual franchises. That means that the franchisor has a duty under the contract to support franchisees' profits. That is an affirmative duty. It is no longer an implied duty of good faith and fair dealing.

The law presumes and implies under every contract there is a duty of good faith. The idea behind the implied duty of good faith is that when people enter a contract they have the right that the other party is not going to inhibit their success. It is implied that both are going to work hard to make it work. But that implied duty cannot create rights. It can only protect the rights written into the agreement. An affirmative duty of good faith says that I am bound to seek your success. That is what we have written into the Griswold franchise contract. Previously the AAFD was also able to insert that into our Homes & Land agreement [another franchise chapter]. We have similar things, although not quite as abundant, in other agreements that AAFD has helped negotiate for franchisee associations.

SNIEGOWSKI: That reminds me of an ex-franchisee of an ice cream chain from years ago. He advocated all franchisees leave the brand. But if there are no franchisees, there is no franchise brand. That, in essence, is burning down the house. It is abandoning the brand and the chain. It leaves no common ground with the franchisor for negotiation if their opponent wants to destroy them and all they have built. Your point of view is different than that ex-franchisee. You say the franchisor needs to be reminded that it and its employees are not alone in wanting to preserve and build the brand. The long-term success of the brand builds value in the franchisees' own holdings.

PURVIN: I understand your viewpoint on that ex-franchisee. However, the AAFD has had systems that deserved to be blown up. Systems that have been fraudulent schemes in which the franchise system was built like a Ponzi scheme that we helped expose. It needed to be gone. In those circumstances, franchisees have also come to the AAFD and collectively just wanted out, even though they recognized that they likely would not make it on their own.

In other circumstances, we can set up franchisees to run the franchise chain. The AAFD actually operates a franchise chain called Kiva Juice. The franchisees had come to AAFD and we discovered that it was a totally fraudulent package. The franchisor sold 60 franchises. Rather than go to jail, he ended up assigning the franchising firm to the independent franchisee association, which is a chapter of the AAFD. All of the intellectual property rights—all of the franchise agreements, the trademarks and trade names – were assigned to the association. That chapter of the AAFD now runs that enterprise. It is a group of franchise owners who came to us, where their issue was to get out from under the man that was bilking them.

But that is not the norm. The typical situation is with franchisees that love the brand and have made a huge investment in it. Our job is to convince the franchisor that we do not have a death wish. If we work together collaboratively, we will accomplish a whole lot more together then if we are always battling each other. The really great franchise systems have done just that. That is what we are always hopeful of achieving.

With Griswold we accomplished a right of ownership. We obtained an affirmative duty of good faith [from the franchisor]. Griswold recognized the owners association as a representative body through which collaboration occurs with franchisees. In most franchise agreements the franchisor carves out something called sole discretion. A big area of franchise law right now is when does a franchisor have sole discretion. In the Griswold agreement there is reasonable discretion and there is sole discretion. In every instance except for one item, the company agrees that even when they exercise sole discretion they must do so with consultation, which is defined in the agreement as sitting down with the franchise association delegate and discussing it. The franchisor does not give up its right to select a buyer of a franchisee's license, but it does give up its right to select without having consultation and agreement.

The other big thing to come out of this is that Griswold restored a recognition of ownership. The whole franchise industry has evolved to a point, thanks to our friends at McDonald's, in which many do not recognize that a franchisee owns their business and has equity in its business. To some franchisor advocates, franchisees are just operators and equity renters. For example, McDonald's calls their franchisees operators, which is why McDonald's has gotten itself into this joint employer problem because the franchisor has evolved in a way in which they control and own the franchise.

We could spend a whole new session just on this one topic of the pickle that franchisors have gotten themselves into in now being considered as a joint employer with the franchisee. That topic may go away with the new administration [President Trump's] and the new Secretary of Labor Andy Puzder [CKE Restaurants CEO, who withdrew his nomination after this interview. Yesterday the President nominated Alexander Acosta, who has served in the National Labor Relations Board].

We have recorded in the Griswold franchise agreement a recognition that a franchisee owns its business. What comes with that are protections of equity – the right to stay in business, the right to renew the franchise. In the Griswold agreement, if the franchise is in compliance [with the franchise agreement and operating standards], it has the right to renew the contract. That protection is not typical in most franchise contracts.

There is not an aspect of this agreement in which we did not achieve collaboration. I'll give you an example: Most franchise agreements that you see have a statement that the franchisee agrees that the franchisee will protect the confidentiality of whatever the franchisor has communicated with them. That gag includes stuff that the franchisee may have developed itself. It is the franchisee that promises to maintain confidentiality, but in contrast the franchisor makes no such promise. For the franchisor, what is yours is mine, and what is mine is mine. The Griswold agreement turns that on its head. The parties mutually agree to maintain the confidentiality of the information.

The franchisees are also recognized to have some goodwill in their businesses, which is almost unheard of.  When franchisees sell their franchise, they are entitled to recover the goodwill of their business.

By the way, it was not a sellout by the franchisor. The franchisor renewed the loyalty of its franchise owners and strengthened a dedication to make the brand better. The franchise agreement should not be an agreement that the franchisee is sorry to sign. It is an agreement which all parties should feel vested in. Both parties take ownership of that contract. It makes for a happier brand because people are proud of what they are accomplishing together.

This article is Part 2 of a series. More to come.


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