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Does the Massachusetts Fair Franchising Act Have Legs?

By Ed Teixeira

Senate Bill 01843 introduced in Massachusetts by legislator Brian A. Joyce has significant implications for franchisors especially in light of the Coverall decision. Learn about this legislation and whether it has a chance to pass.

The Iowa Franchise Act, passed in 1992, was intended to provide Iowa franchisees with a protection against certain actions by franchisors. There were specific provisions of the Act that franchisors considered extremely onerous. Perhaps the most objectionable provision dealt with the issue of encroachment. An interesting component of the encroachment rule directed that the amount of compensation owed an aggrieved franchisee as a result of encroachment would be determined by one of three methods that could be chosen by the franchisee. One of the methods included a panel, “comprised of an equal number of members selected by the franchisee and the franchisor, and one additional member to be selected unanimously by the members selected by the franchisee and the franchisor.”

The Iowa Franchise act was to be retroactive to all prior franchise contracts. In 1992, McDonald's Corporation (McDonald's) and Holiday Inns Franchising, Inc. and Holiday Inns, Inc. (Holiday Inns), filed separate actions for declaratory judgment in federal court claiming that the Act violated provisions of the contract clause contained in the both the United States and Iowa constitutions. The District Court for the Southern District of Iowa agreed with McDonald's and Holiday Inns and granted summary judgment in their favor.

The Act came under heavy fire from franchisors and related interest groups and in 1996 the Act was amended. In terms of franchise regulation the Iowa Franchise Act is considered by some to represent a watershed in terms of State franchise laws and the response it generated.

Now, the Massachusetts legislature is considering similar legislation introduced by State Senator Brian A. Joyce. Known as the Fair Franchising Act, Senate Bill 01843 seeks to further regulate franchising in Massachusetts.

Some of the provisions include:

90 days notice for termination, except in the instance of abandonment or conviction of a felony
Non renewal of a franchise agreement by a franchisor requires 90 days written notice.
A franchisor that opens a new location or outlet that adversely impacts the gross sales of an existing franchisee location shall be liable to the franchisee for monetary damages unless 1. The franchisee was offered the location first or 2. The franchisee was non-compliant with their franchise agreement. This provision is reminiscent of the Iowa Franchise Act including the method to remedy the “injured” franchisee.

A number of franchise industry experts believe that the Massachusetts law has a good chance of passage. A report on the hearing was written by Blue Mau Mau and can be read here.

The Coverall Case

A lawsuit brought by a Coverall franchisee in Massachusetts claimed that the franchisees were de facto employees of Coverall entitled to minimum wage and employee insurance. A ruling in favor of Coverall franchisees has been made by the court. In response to the Coverall ruling a new bill, would exempt franchisors from Massachusetts labor laws that other industries must follow. In any case, the Coverall ruling could be modified or overturned, however, it’s yet another shot across the bow of franchisors.

Although these two issues could be split in favor of both franchisors and franchisees, a Fair Franchising Act in Massachusetts could have impact on the franchise industry and future State franchise regulations given the visibility of Massachusetts from an academic and political standpoint. Time will tell how this story plays out.