Home » Business & Finance » Franchising » The Iowa Franchise Act Stands

The Iowa Franchise Act Stands

© Michele Marrinan

Listen to franchisors and franchisees talk about the Iowa Franchise Act, and you'd think they were referring to two different laws. Passed in 1992 to protect franchisees from unfair practices, the law has become a symbol of fairness in the industry. And it's back in the hot seat.

Franchisor advocates proposed several changes to the law earlier this year; franchisees countered with suggestions of their own. Neither has claimed victory - yet. The state senate let the law stand as is, but the house will take up the issue next year.

Franchisors admit they want total repeal of the law, which they consider to be stifling the local economy. With that scenario unlikely, they say they'll settle for a compromise. "It's antiquated," says Maureen Riehl, director of government relations and associate counsel for the International Franchise Association (http://www.franchise.org), of the law. "When it was passed back in 1992, relations between some large franchisors and their franchisees were probably at the peak of discord. But franchisors across the board have seen the light that the only way they succeed is if their franchisees succeed."

Franchisee advocates they must have missed that revelation; they say they haven't seen much change in the way franchisors treat their franchisees. And they don't expect it. "There's a conflicting interest between franchisors and franchisees," says Robert Zarco (http://www.zarcopardo.com), a Miami attorney who has represented franchisees in many high-profile cases.

"Franchisors have an incentive to place more competing units within the same market because they collect royalties based on top-lying gross sales, regardless of the bottom-line profits for franchisees. Franchisees, on the other hand, want to maximize the gross sales of their individual units. Hence the conflict."

So the battle continues. Riehl, who has been leading much of the IFA's bid to appeal the Iowa law, says franchisors want four changes.

Duty of Good Faith. Franchisors want to redefine the duty of good faith, which today allows courts to look beyond a franchise contract to determine if a franchisor acted in good faith towards its franchisee. "Our definition would basically define duty of good faith to indicate in law that the court could not look outside the four corners of the contract in determining whether a party acted in good faith or bad faith," says Riehl.

Transfers. Iowa law currently includes a list of ownership transfers that do not require franchisor notification. If a franchisee sells 50 percent of his ownership to his partner, for instance, the partners don't have to inform their franchisor of the transfer. Franchisors want to be informed of all transfers, with the exception of transfers between spouses and parent and child.